FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended June 30, 2002
------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the transition period from _________________________ to ____________________
Commission file number
0-16824
---------------------------------------
CNL Income Fund II, Ltd.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2733859
- ------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) ntification No.)
450 South Orange Avenue
Orlando, Florida 32801
- ----------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 540-2000
--------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
CONTENTS
Page
Part I.
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
Part II.
Other Information 12-13
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
June 30, December 31,
2002 2001
------------------ -------------------
ASSETS
Land and buildings on operating leases, net $ 7,680,053 $ 8,541,501
Real estate held for sale 334,289 514,315
Investment in joint ventures 4,128,626 4,154,855
Cash and cash equivalents 1,382,792 559,886
Certificate of deposit 60,774 62,248
Receivables, less allowance for doubtful accounts
of $23,640 in 2001 and 2000 1,917 151,479
Due from related party 3,923 1,607
Accrued rental income 179,781 203,759
Other assets 7,636 3,593
------------------ -------------------
$ 13,779,791 $ 14,193,243
================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 79,205 $ 83,096
Real estate taxes payable 15,318 9,093
Distributions payable 1,123,496 423,496
Due to related parties 176,728 136,638
Rents paid in advance and deposits 43,292 45,428
------------------ -------------------
Total liabilities 1,438,039 697,751
Commitment and Contingency (Note 6)
Partners' capital 12,341,752 13,495,492
------------------ -------------------
$ 13,779,791 $ 14,193,243
================== ===================
See accompanyingnotes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------------- ------------ ----------------- --------------
Revenues:
Rental income from operating leases $ 303,529 $ 325,889 $ 617,233 $ 653,042
Contingent rental income -- 16,170 10,299 14,122
Interest and other income 3,128 1,692 4,797 17,498
-------------- ------------ ----------------- --------------
306,657 343,751 632,329 684,662
-------------- ------------ ----------------- --------------
Expenses:
General operating and administrative 54,633 54,083 120,595 144,588
Property expenses 11,083 674 16,186 9,193
State and other taxes 1,277 2,639 14,946 20,212
Depreciation and amortization 56,507 60,118 114,083 120,236
Provision for write-down of assets 181,231 -- 181,231 --
-------------- ------------ ----------------- --------------
304,731 117,514 447,041 294,229
-------------- ------------ ----------------- --------------
Income Before Gain on Sale of Assets and
Equity in Earnings of Joint Ventures 1,926 226,237 185,288 390,433
Gain on Sale of Assets 133,604 -- 133,604 --
Equity in Earnings of Joint Ventures 83,130 104,781 177,465 211,748
-------------- ------------ ----------------- --------------
Income from Continuing Operations 218,660 331,018 496,357 602,181
-------------- ------------ ----------------- --------------
Discontinued Operations (Note 4):
Loss from discontinued operations, net (8,390 ) (58,420 ) (14,553 ) (77,643 )
Loss on disposal of discontinued operations, net (88,552 ) -- (88,552 ) (145,535 )
-------------- ------------ ----------------- --------------
(96,942 ) (58,420 ) (103,105 ) (223,178 )
-------------- ------------ ----------------- --------------
Net Income $ 121,718 $ 272,598 $ 393,252 $ 379,003
============== ============ ================= ==============
Net Income (Loss) Per Limited Partner Unit:
Continuing Operations $ 4.37 $ 6.62 $ 9.93 $ 12.04
Discontinued Operations (1.94 ) (1.17 ) (2.06 ) (4.46 )
-------------- ------------ ----------------- --------------
Total $ 2.43 $ 5.45 $ 7.87 $ 7.58
============== ============ ================= ==============
Weighted Average Number of Limited Partner
Units Outstanding 50,000 50,000 50,000 50,000
============== ============ ================= ==============
See accompanyingnotes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Six Months Ended Year Ended
June 30, December 31,
2002 2001
-------------------- ------------------
General partners:
Beginning balance $ 405,788 $ 405,788
Net income -- --
-------------------- ------------------
405,788 405,788
-------------------- ------------------
Limited partners:
Beginning balance 13,089,704 14,749,608
Net income 393,252 1,253,746
Distributions ($30.94 and $58.27 per
limited partner unit, respectively) (1,546,992 ) (2,913,650 )
-------------------- ------------------
11,935,964 13,089,704
-------------------- ------------------
Total partners' capital $ 12,341,752 $ 13,495,492
==================== ==================
See accompanyingnotes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
2002 2001
--------------- --------------
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 694,811 $ 783,426
--------------- --------------
Cash Flows from Investing Activities:
Proceeds from sale of assets 747,508 --
Insurance proceeds for casualty loss on building 227,579 --
Investment in certificate of deposit -- (60,038 )
--------------- --------------
Net cash provided by (used in) investing activities 975,087 (60,038 )
--------------- --------------
Cash Flows from Financing Activities:
Distributions to limited partners (846,992 ) (866,658 )
--------------- --------------
Net cash used in financing activities (846,992 ) (866,658 )
--------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents 822,906 (143,270 )
Cash and Cash Equivalents at Beginning of Period 559,886 492,503
--------------- --------------
Cash and Cash Equivalents at End of Period $ 1,382,792 $ 349,233
=============== ==============
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Deferred real estate disposition fee incurred and unpaid at
end of period $ 22,500 $ --
=============== ==============
Distributions declared and unpaid at end of period $ 1,123,496 $ 433,329
=============== ==============
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2002 and 2001
1. 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 are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and six months ended June 30, 2002 may not be indicative of
the results that may be expected for the year ending December 31, 2002.
Amounts as of December 31, 2001, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund II, Ltd. (the "Partnership") for the year ended December
31, 2001.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement requires that a
long-lived asset be tested for recoverability whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset.
The assessment is based on the carrying amount of the asset at the date
it is tested for recoverability. An impairment loss is recognized when
the carrying amount of a long-lived asset exceeds its fair value. If an
impairment is recognized, the adjusted carrying amount of a long-lived
asset is its new cost basis. The statement also requires that the
results of operations of a component of an entity that either has been
disposed of or is classified as held for sale be reported as a
discontinued operation if the disposal activity was initiated
subsequent to the adoption of the Standard.
2. Reclassification:
Certain items in the prior years' financial statements have been
reclassified to conform to 2002 presentation. These reclassifications
had no effect on total partners' capital or net income.
3. Land and Buildings on Operating Leases:
In June 2002, the Partnership sold its Burger King property in San
Antonio, Texas and received net sales proceeds of approximately
$725,000, resulting in a gain of approximately $133,600. In connection
with the sale, the Partnership incurred a deferred, subordinated, real
estate disposition fee of $22,500 (see Note 5). Payment of the real
estate disposition fee is subordinated to receipt by the limited
partners of their aggregate, cumulative 10% Preferred Return, plus
their adjusted capital contributions. This property was identified for
sale as of December 31, 2001.
In June 2002, the Partnership recorded a provision for write-down of
assets of $181,231 relating to the property in Pineville, Louisiana due
to the fact that the tenant opted to not renew its lease, which expired
in June 2002, and vacated the Property. The provision represented the
difference between the carrying value of the property and its fair
value.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2002 and 2001
4. Discontinued Operations:
In June 2002, the Partnership entered into an agreement, with an
unrelated third party, to sell the Denny's property in Rock Springs,
Wyoming. During the year ended December 31, 2001, the building on the
Casper, Wyoming property was destroyed by fire and subsequently
demolished. In June 2002, the Partnership entered into an agreement
with an unrelated third party to sell the land. As a result, the
Partnership reclassified these assets from land and buildings on
operating leases to real estate held for sale. The reclassified assets
were recorded at the lower of their carrying amount or fair value, less
cost to sell. In addition, the Partnership stopped recording
depreciation once the property in Rock Springs, Wyoming was placed up
for sale. In connection with the destruction of the building by the
fire during the year ended December 31, 2001, the Partnership recorded
a provision for write-down of assets of $78,015, which represented the
loss incurred by the Partnership in excess of anticipated insurance
proceeds. The undepreciated cost of the building of $216,817 was
removed from the accounts and the anticipated insurance proceeds of
$138,802 were included in accounts receivable. During the six months
ended June 30, 2002, the Partnership contested the settlement of the
insurance claim, and in June 2002, received an additional $88,777 in
insurance proceeds, which the Partnership recorded as a gain on
casualty loss on building. In connection with the anticipated sale of
the land, the Partnership recorded a loss on disposal of assets of
$63,714 during the quarter and six months ended June 30, 2002. In
addition, in connection with the anticipated sale of the property in
Rock Springs, Wyoming, the Partnership recorded a loss on disposal of
assets of $113,615 during the quarter and six months ended June 30,
2002. The financial results for these properties are reflected as
Discontinued Operations in the accompanying financial statements.
The operating results of discontinued operations are as follows:
Quarter Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
-------------- --------------- ------------- ---------------
Other income $ -- $ 567 $ 45 $ --
Expenses (8,390 ) (58,987 ) (14,598 ) (77,643 )
Loss on disposal of assets (88,552 ) -- (88,552 ) (145,535 )
-------------- --------------- ------------- ---------------
Loss from discontinued operations $ (96,942 ) $ (58,420 ) $ (103,105 ) $ (223,178 )
============== =============== ============= ===============
5. Related Party Transactions:
An affiliate of the Partnership is entitled to receive a deferred,
subordinated real estate disposition fee, payable upon the sale of one
or more properties based on the lesser of one-half of a competitive
real estate commission or three percent of the sales price if the
affiliate provides a substantial amount of services in connection with
the sale. However, if the net sales proceeds are reinvested in a
replacement property, no such real estate disposition fees will be
incurred until such replacement property is sold and the net sales
proceeds are distributed. The payment of the real estate disposition
fee is subordinated to receipt by the limited partners of their
aggregate 10% Preferred Return, plus their adjusted capital
contributions. During the six months ended June 30, 2002, the
Partnership incurred a deferred, subordinated, real estate disposition
fee of $22,500 as a result of the sale of a property (see Note 3.)
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2002 and 2001
6. Commitment and Contingency:
In connection with a proposed sale of a Property in Ocala, Florida,
underground petroleum contamination was discovered during the due
diligence phase in a prior year. As a result of the discovery of the
contamination, the sales contract was terminated. The Partnership
applied to a state funded clean-up program and received notification it
was eligible for state assistance. Under the state funded clean-up
program, the Partnership will be responsible for 25% of the actual
clean-up costs and will receive assistance for the remaining 75% of the
costs. The Partnership anticipated that future clean-up costs would be
approximately $300,000 and during the year ended December 31, 2000,
accrued 25%, or $75,000 of the estimated clean-up costs as a liability.
During the quarter and six months ended June 30, 2002, phase one of the
clean-up work commenced at the site.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CNL Income Fund II, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on November 13, 1986 to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurant properties, as well as land upon which restaurants were to
be constructed, which are leased primarily to operators of national and regional
fast-food restaurant chains (collectively, the "Properties"). The leases
generally are triple-net leases, with the lessees responsible for all repairs
and maintenance, property taxes, insurance and utilities. As of June 30, 2001,
the Partnership owned 22 Properties directly and 10 Properties indirectly,
through joint venture of tenancy in common arrangements. As of June 30, 2002,
the Partnership owned 21 Properties directly and nine Properties indirectly,
through joint venture or tenancy in common arrangements.
Capital Resources
The Partnership generated cash from operating activities (which
includes cash received from tenants, distributions from joint ventures, and
interest and other income received) of $694,811 and $783,426 during the six
months ended June 30, 2002 and 2001, respectively. The decrease in cash from
operating activities for the six months ended June 30, 2002, as compared to the
same period of 2001 was primarily a result of changes in the Partnership's
working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 2002.
In October 2001, the Property in Casper, Wyoming was partially
destroyed by fire. As a result, the Partnership collected approximately $227,600
in insurance proceeds.
In June 2002, the Partnership sold its Burger King Property in San
Antonio, Texas, to the tenant and received net sales proceeds of approximately
$725,000, resulting in a gain of approximately $133,600. In connection with the
sale, the Partnership incurred a deferred, subordinated, real estate disposition
fee of $22,500. Payment of the real estate disposition fee is subordinated to
receipt by the limited partners of their aggregate, cumulative 10% Preferred
Return, plus their adjusted capital contributions. The Partnership distributed
the majority of the net sales proceeds to the limited partners, as described
below. The Partnership distributed amounts sufficient to enable the limited
partners to pay federal and state income taxes, if any (at a level reasonably
assumed by the general partners), resulting from the sale.
Currently, rental income from the Partnership's Properties and any net
sales proceeds are invested in money market accounts or other short-term, highly
liquid investments such as demand deposit accounts at commercial banks, money
market accounts and certificates of deposit with less than a 90-day maturity
date, pending the Partnership's use of such funds to pay Partnership expenses or
to make distributions to the partners. At June 30, 2002, the Partnership had
$1,382,792 invested in such short-term investments, as compared to $559,886 at
December 31, 2001. The increase in the amount invested in short-term investments
at June 30, 2002, as compared to December 31, 2001, is attributable to the
Partnership receiving proceeds from the sale of the Property in San Antonio,
Texas. The funds remaining at June 30, 2002 will be used to pay distributions
and other liabilities of the Partnership.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of operating expenses of the Partnership, to the extent that
the general partners determine that such funds are available for distribution.
Based on current and anticipated future cash from operations, and for the six
months ended June 30, 2002, sales proceeds and insurance proceeds, as described
above, and for the six months ended June 30, 2001, a loan from the corporate
general partner, the Partnership declared distributions to limited partners
$1,546,992 and $866,658, for the six months ended June 30, 2002 and 2001,
respectively ($1,123,496 and $433,329 for the quarters ended June 30, 2002 and
2001, respectively.) This represents distributions of $30.94 and $17.33 per unit
for the six months ended June 30, 2002 and 2001, respectively ($22.47 and $8.67
per unit for each applicable quarter.) Distributions for the six months ended
June 30, 2002 included $700,000 in a special distribution as a result of the
distribution of net sales proceeds from the sale of the Property in San Antonio,
Texas. The special distribution was effectively a return of a portion of the
limited partners' investment, although, in accordance with the Partnership
agreement, $481,914 was applied toward the limited partners' 10% Preferred
Return and the balance of $218,086 was treated as a return of capital for
purposes of calculating the limited partners' 10% Preferred Return. As a result
of the return of capital, the amount of the limited partners' invested capital
contributions (which generally is the limited partners' capital contributions,
less distributions from the sale of a Property that are considered to be a
return of capital) was decreased; therefore, the amount of the limited partners'
invested capital contributions on which the 10% Preferred Return is calculated
was lowered. As a result of the sale of the Properties, the Partnership's total
revenue was reduced and is expected to remain reduced in subsequent periods,
while the majority of the Partnership's operating expenses remained and are
expected to remain fixed. No distributions were made to the general partners for
the quarters and six months ended June 30, 2002 and 2001. The Partnership
intends to continue to make distributions of cash available for distribution to
the limited partners on a quarterly basis.
Total liabilities of the Partnership, including distributions payable,
were $1,438,039 at June 30, 2002, as compared to $697,751 at December 31, 2001.
The increase in total liabilities was primarily a result of the Partnership
accruing a special distribution to the limited partners of $700,000 of net sales
proceeds at June 30, 2002 from the sale of the Property in San Antonio, Texas,
as described above. Total liabilities at June 30, 2002, to the extent they
exceed cash and cash equivalents, will be paid from anticipated future cash from
operations, or in the event the general partners elect to make additional
capital contributions or loans, from the future general partners' capital
contributions or loans.
In connection with the proposed sale of a Property in Ocala, Florida,
underground petroleum contamination was discovered during the due diligence
phase in a prior year. As a result of the discovery of the contamination, the
sales contract was terminated. The Partnership applied to a state funded
clean-up program and received notification it was eligible for state assistance.
Under the state funded clean-up program, the Partnership will be responsible for
25% of the actual clean-up costs and will receive assistance for the remaining
75% of the costs. The Partnership anticipated that future clean-up costs would
be approximately $300,000 and during the year ended December 31, 2000, accrued
25%, or $75,000 of the estimated clean-up costs as a liability. During the
quarter and six months ended June 30, 2002, phase one of the clean-up work
commenced at the site.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Total rental revenues were $627,532 for the six months ended June 30,
2002, as compared to $667,164 for the six months ended June 30, 2001, of which
$303,529 and $342,059 were earned during the second quarter of 2002 and 2001,
respectively. The decrease in rental revenues during the quarter and six months
ended June 30, 2002, as compared to the same periods of 2001, was partially due
to the 2001 sale of the Property in Bay City, Texas and the 2002 sale of the
Property in San Antonio, Texas. Rental revenues from wholly owned Properties are
expected to remain at reduced amounts as a result of the Partnership
distributing the net sales proceeds relating to these two sales to the limited
partners during 2001 and 2002. The decrease in rental revenues during the
quarter and six months ended June 30, 2002, as compared to the same periods of
2001, was also partially due to a decrease in gross sales of certain restaurant
Properties, the leases of which require the payment of contingent rental income.
During the second quarter of 2002, the leases for the Properties in
Tomball, Texas and Pineville, Louisiana expired. The Partnership will not
receive any rental revenues from these two vacant Properties until the
Properties are re-leased. The lost revenues resulting from the expiration of
these leases will have an adverse effect on the results of operations of the
Partnership if the Partnership is not able to re-lease the Properties in a
timely manner. The Partnership is currently seeking replacement tenants for
these two vacant Properties.
During the six months ended June 30, 2002 and 2001, the Partnership
earned $177,465 and $211,748, respectively, attributable to net income earned by
joint ventures, of which $83,130 and $104,781 were earned during the quarters
ended June 30, 2002 and 2001, respectively. The decrease in net income earned by
joint ventures during the quarter and six months ended June 30, 2002, as
compared to the same periods of 2001, was partially due to the fact that,
Houlihan's Restaurant, Inc., which leased the Property owned by Show Low Joint
Venture, in which the Partnership owns an approximate 64% interest, was
experiencing financial difficulties and in January 2002, filed for bankruptcy
and rejected the lease relating to this Property. The joint venture will not
receive any rental revenues from this Property until the Property is re-leased.
The joint venture is currently seeking a replacement tenant for this Property.
The lost revenues resulting from the vacant Property will have an adverse effect
on the equity in earnings of joint ventures, if the joint venture is not able to
re-lease the Property in a timely manner. The decrease in net income during the
quarter and six months ended June 30, 2002, was also partially due to the fact
that in August 2001, Peoria Joint Venture, in which the Partnership owned a 48%
interest, sold its Property, and the Partnership dissolved the joint venture in
accordance with the joint venture agreement. The Partnership expects that net
income earned by joint ventures will remain at reduced levels as a result of
distributing the proceeds to the limited partners.
The decrease in net income earned by joint ventures during the quarter
and six months ended June 30, 2002, was partially offset by the fact the
Partnership and CNL Income Fund V, Ltd., as tenants-in-common, re-leased the
Property in Mesa, Arizona which had become vacant in June 2000, to a new tenant
in September 2001 with terms substantially the same as the Partnership's other
leases.
Operating expenses, including depreciation and amortization, and
provision for write-down of assets, were $447,041 and $294,229 for the six
months ended June 30, 2002 and 2001, respectively, of which $304,731 and
$117,514 was incurred during the quarters ended June 30, 2002 and 2001,
respectively. The increase during the quarter and six months ended June 30,
2002, as compared to the same periods of 2001, was primarily due to the fact
that the Partnership recorded a provision for write-down of assets of $181,231,
relating to the property in Pineville, Louisiana, due to the fact that the
tenant opted to not renew its lease, which expired in June 2002, and vacated the
Property. The provision represented the difference between the carrying value of
the property and its fair value. The increase in operating expenses during the
six months ended June 30, 2002, as compared to the same period of 2001, was
partially offset due to a decrease in state tax expense and a decrease in the
costs incurred for administrative expenses for servicing the Partnership and its
Properties.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement requires that a long-lived asset
be tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. The carrying amount of
a long-lived asset is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the
asset. The assessment is based on the carrying amount of the asset at the date
it is tested for recoverability. An impairment loss is recognized when the
carrying amount of a long-lived asset exceeds its fair value. If an impairment
is recognized, the adjusted carrying amount of a long-lived asset is its new
cost basis. The statement also requires that the results of operations of a
component of an entity that either has been disposed of or is classified as held
for sale be reported as a discontinued operation if the disposal activity was
initiated subsequent to the adoption of the Standard.
In June 2002, the Partnership sold its Burger King Property in San
Antonio, Texas resulting in a gain of approximately $133,600. This Property was
identified for sale as of December 31, 2001.
During the year ended December 31, 2001, the building on the Casper,
Wyoming Property was destroyed by fire and subsequently demolished. In June
2002, the Partnership entered into an agreement with an unrelated third party to
sell the land. In June 2002, the Partnership entered into another agreement with
an unrelated third party, to sell the Denny's Property in Rock Springs, Wyoming.
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the
Partnership reclassified these assets from land and building on operating leases
to real estate held for sale. The Partnership recorded the reclassified assets
at the lower of their carrying amount or fair value, less cost to sell. In
addition, during the six months ended June 30, 2002, the Partnership stopped
recording depreciation upon placing the Properties up for sale. The Partnership
recognized a net rental loss (rental revenues less Property related expenses) of
$14,553 and $77,643 during the six months ended June 30, 2002 and 2001,
respectively, of which $8,390 and $58,420 were incurred during the quarters
ended June 30, 2002 and 2001, respectively. During 2000, Phoenix Restaurant
Group, Inc. and its Subsidiaries (collectively referred to as "PRG"), the tenant
of these two Properties, experienced financial difficulties and in October 2001,
filed for Chapter 11 bankruptcy protection, and rejected the leases related to
these Properties. As a result, during the quarter ended March 31, 2001, the
Partnership stopped recording rental income relating to these two Properties.
The Partnership has no remaining leases with PRG. During the quarters and six
months ended June 30, 2002 and 2001, the Partnership incurred Property related
expenses, such as legal fees, repairs and maintenance, insurance and real estate
taxes relating to these Properties. As a result of the building on the Casper,
Wyoming Property being destroyed by fire, during the year ended December 31,
2001, the Partnership recorded a provision for write-down of assets of $78,015,
which represented the loss incurred by the Partnership in excess of anticipated
insurance proceeds. The undepreciated cost of the building of $216,817 was
removed from the accounts and the anticipated insurance proceeds of $138,802
were included in accounts receivable. During the six months ended June 30, 2002,
the Partnership contested the settlement of the insurance claim, and in June
2002, received an additional $88,777 in insurance proceeds, which the
Partnership recorded as a gain on casualty loss on building. In connection with
the anticipated sale of the land, the Partnership recorded a loss on disposal of
assets of $63,714 during the quarter and six months ended June 30, 2002. In
addition, in connection with the anticipated sale of the Property in Rock
Springs, Wyoming, the Partnership recorded a loss on disposal of assets of
$113,615 during the quarter and six months ended June 30, 2002. The financial
results relating to these Properties are reported as Discontinued Operations in
the financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
Item 2. Changes in Securities. Inapplicable.
Item 3. Defaults upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
Item 5. Other Information. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to
Registration Statement No. 33-10351 on Form S-11 and
incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as Exhibit
3.2 to Form 10-K filed with the Securities and Exchange
Commission on April 2, 1993, and incorporated herein by
reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 4.1 to Amendment No. 1 to
Registration Statement No. 33-10351 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as Exhibit
3.2 to Form 10-K filed with the Securities and Exchange
Commission on April 2, 1993, and incorporated herein by
reference.)
10.1 Property Management Agreement (Included as Exhibit 10.1 to
Form 10-K filed with the Securities and Exchange Commission
on April 2, 1993, and incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc.
(Included as Exhibit 10.2 to Form 10-K filed with the
Securities and Exchange Commission on March 30, 1995, and
incorporated herein by reference.)
10.3 Assignment of Property Management Agreement from CNL Income
Fund Advisors, Inc. to CNL Fund Advisors, Inc. (Included as
Exhibit 10.3 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996 and incorporated herein
by reference.)
10.4 Assignment of Management Agreement from CNL Fund Advisors,
Inc. to CNL APF Partners, LP. (Included as Exhibit 10.4 to
Form 10-Q filed with the Securities and Exchange Commission
on August 13, 2001, and incorporated herein be reference.)
10.5 Assignment of Management Agreement from CNL APF Partners, LP
to CNL Restaurants XVIII, Inc. (Filed herewith.)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DATED this 12th day of August, 2002.
CNL INCOME FUND II, LTD.
By: CNL REALTY CORPORATION
GeneralPartner
By: /s/ James M. Seneff, Jr.
------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
OF CORPORATE GENERAL PARTNER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, James M. Seneff, Jr., the Chief Executive Officer of CNL Realty
Corporation, the corporate general partner of CNL Income Fund II, Ltd. (the
"Partnership"), has executed this certification in connection with the filing
with the Securities and Exchange Commission of the Partnership's Quarterly
Report on Form 10-Q for the period ending June 30, 2002 (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 Partnership.
Date: August 12, 2002 /s/ James M. Seneff, Jr.
------------------------------
Name: James M. Seneff, Jr.
Title: Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
OF CORPORATE GENERAL PARTNER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Robert A. Bourne, the President and Treasurer of CNL Realty
Corporation, the corporate general partner of CNL Income Fund II, Ltd. (the
"Partnership"), has executed this certification in connection with the filing
with the Securities and Exchange Commission of the Partnership's Quarterly
Report on Form 10-Q for the period ending June 30, 2002 (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 Partnership.
Date: August 12, 2002 /s/ Robert A. Bourne
------=-----------------------
Name: Robert A. Bourne
Title:President and Treasurer
EXHIBIT INDEX
Exhibit Number
3.1 Certificate of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to
Registration Statement No. 33-10351 on Form S-11 and
incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as
Exhibit 3.2 to Form 10-K filed with the Securities and
Exchange Commission on April 2, 1993, and incorporated
herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 4.1 to Amendment No. 1 to
Registration Statement No. 33-10351 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as
Exhibit 3.2 to Form 10-K filed with the Securities and
Exchange Commission on April 2, 1993, and incorporated
herein by reference.)
10.1 Property Management Agreement (Included as Exhibit 10.1
to Form 10-K filed with the Securities and Exchange
Commission on April 2, 1993, and incorporated herein by
reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc.
(Included as Exhibit 10.2 to Form 10-K filed with the
Securities and Exchange Commission on March 30, 1995, and
incorporated herein by reference.)
10.3 Assignment of Property Management Agreement from CNL
Income Fund Advisors, Inc. to CNL Fund Advisors, Inc.
(Included as Exhibit 10.3 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996 and
incorporated herein by reference.)
10.4 Assignment of Management Agreement from CNL Fund
Advisors, Inc. to CNL APF Partners, LP. (Included as
Exhibit 10.4 to Form 10-Q filed with the Securities and
Exchange Commission on August 13, 2001, and incorporated
herein be reference.)
10.5 Assignment of Management Agreement from CNL APF Partners,
LP to CNL Restaurants XVIII, Inc. (Filed herewith.)
EXHIBIT 10.5