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 September 30, 2002
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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) Identification 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 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 12
Item 4. Controls and Procedures 12-13
Part II.
Other Information 14-15
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
September 30 December 31,
2002 2001
------------------ -------------------
ASSETS
Land and buildings on operating leases, net $ 6,460,270 $ 7,349,142
Real estate held for sale 1,031,748 1,706,674
Investment in joint ventures 4,121,103 4,154,855
Cash and cash equivalents 913,097 559,886
Certificate of deposit 61,511 62,248
Receivables, less allowance for doubtful accounts
of $23,640 in 2001 3,624 153,086
Accrued rental income 181,210 203,759
Other assets 5,456 3,593
------------------ -------------------
$ 12,778,019 $ 14,193,243
================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 80,501 $ 83,096
Real estate taxes payable 26,623 9,093
Distributions payable 743,537 423,496
Due to related parties 184,812 136,638
Rents paid in advance and deposits 57,889 45,428
------------------ -------------------
Total liabilities 1,093,362 697,751
Commitment and Contingency (Note 7)
Partners' capital 11,684,657 13,495,492
------------------ -------------------
$ 12,778,019 $ 14,193,243
================== ===================
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------------- ------------ ----------------- --------------
Revenues:
Rental income from operating leases $ 226,595 $ 280,141 $ 759,658 $ 840,937
Contingent rental income 18,505 13,743 28,804 30,324
Interest and other income 10,351 19,803 15,193 37,301
-------------- ------------ ----------------- --------------
255,451 313,687 803,655 908,562
-------------- ------------ ----------------- --------------
Expenses:
General operating and administrative 46,242 29,762 166,837 174,291
Property expenses 5,344 5,446 19,632 14,140
Provision for doubtful accounts -- 7,122 -- 52,295
State and other taxes -- -- 14,946 20,212
Depreciation and amortization 45,746 50,331 141,632 152,687
Provision for write-down of assets -- -- 181,231 --
-------------- ------------ ----------------- --------------
97,332 92,661 524,278 413,625
-------------- ------------ ----------------- --------------
Income Before Gain on Sale of Assets and
Equity in Earnings of Joint Ventures 158,119 221,026 279,377 494,937
Gain on Sale of Assets -- 204,179 133,603 204,179
Equity in Earnings of Joint Ventures 85,247 166,977 262,712 378,725
-------------- ------------ ----------------- --------------
Income from Continuing Operations 243,366 592,182 675,692 1,077,841
-------------- ------------ ----------------- --------------
Discontinued Operations (Note 4):
Income from discontinued operations, net 8,795 30,359 58,273 69,238
Loss on disposal of discontinued operations, net (165,719 ) -- (254,271 ) (145,535 )
-------------- ------------ ----------------- --------------
(156,924 ) 30,359 (195,998 ) (76,297 )
-------------- ------------ ----------------- --------------
Net Income $ 86,442 $ 622,541 $ 479,694 $ 1,001,554
============== ============ ================= ==============
Net Income (Loss) Per Limited Partner Unit:
Continuing Operations $ 4.87 $ 11.84 $ 13.51 $ 21.56
Discontinued Operations (3.14 ) 0.61 (3.92 ) (1.53 )
-------------- ------------ ----------------- --------------
Total $ 1.73 $ 12.45 $ 9.59 $ 20.03
============== ============ ================= ==============
Weighted Average Number of Limited Partner
Units Outstanding 50,000 50,000 50,000 50,000
============== ============ ================= ==============
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Nine Months Ended Year Ended
September 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 479,694 1,253,746
Distributions ($45.81 and $58.27 per
limited partner unit, respectively) (2,290,529 ) (2,913,650 )
---------------------- ------------------
11,278,869 13,089,704
---------------------- ------------------
Total partners' capital $ 11,684,657 $ 13,495,492
====================== ==================
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2002 2001
--------------- --------------
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 1,030,277 $ 1,196,903
--------------- --------------
Cash Flows from Investing Activities:
Proceeds from sale of assets 1,065,843 548,874
Insurance proceeds for casualty loss on building 227,579 --
Liquidating distribution from joint venture -- 830,263
Investment in certificate of deposit -- (60,038 )
--------------- --------------
Net cash provided by investing activities 1,293,422 1,319,099
--------------- --------------
Cash Flows from Financing Activities:
Proceeds from loan from corporate general partner -- 75,000
Repayment of loan from corporate general partner -- (75,000 )
Distributions to limited partners (1,970,488 ) (1,299,987 )
--------------- --------------
Net cash used in financing activities (1,970,488 ) (1,299,987 )
--------------- --------------
Net Increase in Cash and Cash Equivalents 353,211 1,216,015
Cash and Cash Equivalents at Beginning of Period 559,886 492,503
--------------- --------------
Cash and Cash Equivalents at End of Period $ 913,097 $ 1,708,518
=============== ==============
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Deferred real estate disposition fee incurred and unpaid at
end of period $ 32,829 $ 16,620
=============== ==============
Distributions declared and unpaid at end of period $ 743,537 $ 1,623,496
=============== ==============
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 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 nine months ended September 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
$747,500, 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 estimated
fair value.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2002 and 2001
4. Discontinued Operations:
-----------------------
During the year ended December 31, 2001, the building on the Casper,
Wyoming property was partially destroyed by fire and subsequently
demolished. 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. 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 an adjustment to casualty loss on building. At
June 2002, in connection with the anticipated sale of the land, the
Partnership recorded a loss on disposal of assets of $63,714. The
provision represented the difference between the carrying value of the
property and its fair value. In August 2002, the Partnership sold the
land to an unrelated party and received net sales proceeds of
approximately $113,700, resulting in an additional loss on disposal of
assets of $10,626.
During 2001, the Partnership recorded a provision for write-down of
assets in the amount of $145,535 relating to the Denny's property in
Rock Springs, Wyoming due to the fact that on October 31, 2001, Phoenix
Restaurant Group, Inc. and its Subsidiaries (collectively referred to
as "PRG"), a tenant of the Partnership, filed for Chapter 11 bankruptcy
protection and rejected the lease related to this Property. The
provision represented the difference between the carrying value of the
property at December 31, 2001 and its estimated fair value. In addition
at June 2002, in connection with the anticipated sale of this property,
the Partnership recorded a loss on disposal of assets of $113,615. The
provision represented the difference between the carrying value of the
property and its fair value. In August 2002, the Partnership sold the
property to an unrelated party and received net sales proceeds of
approximately $204,700, resulting in an additional loss on disposal of
assets of $15,341.
In connection with the sales of the properties in Casper and Rock
Springs, Wyoming, the Partnership incurred deferred, subordinated, real
estate disposition fees of $10,329 (see Note 5). Payment of the real
estate disposition fees is subordinated to receipt by the limited
partners of their aggregate, cumulative 10% Preferred Return, plus
their adjusted capital contributions.
In August 2002, the Partnership entered into an agreement to sell the
property in Tomball, Texas and was negotiating a separate agreement to
sell the property in Nederland, Texas, with unrelated third parties. In
connection with the anticipated sale of the property in Tomball, Texas,
the Partnership recorded a loss on disposal of assets of $139,752 at
September 2002. The provision represented the difference between the
carrying value of the property and its fair value. 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 properties were placed up for sale.
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------------- --------------- ------------- ---------------
Rental revenues $ 21,896 $ 49,388 $ 106,066 $ 139,175
Expenses (13,101 ) (19,029 ) (47,793 ) (69,937 )
Loss on disposal of assets (165,719 ) -- (254,271 ) (145,535 )
-------------- --------------- ------------- ---------------
Income (loss) from discontinued
operations $ (156,924 ) $ 30,359 $ (195,998 ) $ (76,297 )
============== =============== ============= ===============
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2002 and 2001
5. Related Party Transactions:
--------------------------
An affiliate of the Partnership is entitled to receive deferred,
subordinated real estate disposition fees, 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 nine months ended September 30, 2002, the
Partnership incurred deferred, subordinated, real estate disposition
fees of $32,829 as a result of the sales of properties (see Note 3 and
4).
6. Concentration of Credit Risk:
----------------------------
For the nine months ended September 30, 2002 and 2001, rental revenues
from Golden Corral Corporation were $191,308 and $307,568,
respectively, representing more than ten percent of the Partnership's
total rental revenues (including the Partnership's share of rental
revenues from joint ventures and the properties held as
tenants-in-common with affiliates of the general partners).
In addition, the following schedule presents total rental revenues from
individual restaurant chains, each representing more than ten percent
of the Partnership's total rental revenues (including the Partnership's
share of rental revenues from joint ventures and properties held as
tenants-in-common with affiliates of the general partners) for each of
the nine months ended September 30:
2002 2001
-------------- ---------------
Golden Corral Family Steakhouse Restaurants $ 198,607 $ 307,568
Wendy's Old Fashioned Hamburger Restaurants 159,895 162,736
Pizza Hut Restaurants 123,636 N/A
The information denoted by N/A indicates that for each period
presented, the tenant and the chain did not represent more than ten
percent of the Partnership's total rental revenues.
Although the Partnership's properties are geographically diverse
throughout the United States and the Partnership's lessees operate a
variety of restaurant concepts, default by the lessee or any one of
these restaurant chains could significantly impact the results of
operations of the Partnership if the Partnership is not able to
re-lease the properties in a timely manner.
7. Commitment and Contingency:
--------------------------
Underground petroleum contamination was discovered in a prior year
relating to a Property in Ocala, Florida. 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 has accrued $75,000 of the estimated
clean-up costs as a liability. During the nine months ended September
30, 2002, phase one of the clean-up work commenced at the site and
payment of the first installment was made.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2002 and 2001
8. Subsequent Event:
----------------
In October 2002, the Partnership sold to an unrelated third party the
property in Tomball, Texas and received net sales proceeds of
approximately $458,200. In connection with the anticipated sale, a loss
on disposal of assets of $139,752 was recognized at September 2002 (see
note 4).
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 September 30,
2001, the Partnership owned 22 Properties directly and nine Properties
indirectly, through joint venture of tenancy in common arrangements. As of
September 30, 2002, the Partnership owned 19 Properties directly and nine
Properties indirectly, through joint venture or tenancy in common arrangements.
Capital Resources
Cash from operating activities (which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received) was $1,030,277 and $1,196,903 during the nine months ended September
30, 2002 and 2001, respectively. The decrease in cash from operating activities
for the nine months ended September 30, 2002, as compared to the same period of
2001 was a result of changes in the Partnership's working capital and changes in
income and expenses, as described in "Results of Operations" below.
Other sources and uses of capital included the following during the
nine months ended September 30, 2002.
In October 2001, the Property in Casper, Wyoming was partially
destroyed by fire. As a result during 2002, the Partnership collected
approximately $227,600 in insurance proceeds and demolished the building. At
June 2002, in connection with the anticipated sale of the land, the Partnership
recorded a loss on disposal of assets of $63,714. The provision represented the
difference between the carrying value of the property and its fair value. In
August 2002, the Partnership sold the land to an unrelated third party and
received net sales proceeds of approximately $113,700, resulting in an
additional loss of $10,626.
In addition at June 2002, in connection with the anticipated sale of
the Denny's Property in Rock Springs, Wyoming, the Partnership recorded a loss
on disposal of assets of $113,615. The provision represented the difference
between the carrying value of the property and its fair value. In August 2002,
the Partnership sold the property to an unrelated party and received net sales
proceeds of approximately $204,700, resulting in an additional loss on disposal
of assets of $15,341.
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. 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.
The Partnership distributed the majority of the net sales proceeds from
the sales of the three Properties to the limited partners, as described below.
In connection with the sales of the properties, the Partnership incurred
deferred, subordinated, real estate disposition fees of $32,829. Payment of the
real estate disposition fees is subordinated to receipt by the limited partners
of their aggregate, cumulative 10% Preferred Return, plus their adjusted capital
contributions.
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 September 30, 2002, the Partnership
had $913,097 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 September 30, 2002, as compared to December 31, 2001, is attributable to the
Partnership receiving proceeds from the sales of the Properties in Casper and
Rock Springs, Texas. The funds remaining at September 30, 2002 will be used to
pay distributions and other liabilities of the Partnership.
In October 2002, the Partnership sold to an unrelated third party the
property in Tomball, Texas and received net sales proceeds of approximately
$458,200. In connection with the anticipated sale, a loss on disposal of assets
of $139,752 was recognized at September 2002.
Short-Term Liquidity
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 generate net cash flow in
excess of operating expenses.
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
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.
Total liabilities of the Partnership, including distributions payable,
were $1,093,362 at September 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 $400,000
of net sales proceeds at September 30, 2002 from the sale of the Properties in
Casper and Rock Springs, Wyoming, as described above. Total liabilities at
September 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.
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, the insurance
proceeds received in 2002, and a portion of the proceeds received from the 2002
and 2001 sales of Properties, the Partnership declared distributions to the
limited partners of $2,290,529 and $2,490,154, respectively ($743,537 and
$1,623,496 for the quarters ended September 30, 2002 and 2001, respectively.)
This represents distributions of $45.81 and $49.80 per unit for the nine months
ended September 30, 2002 and 2001, respectively ($14.87 and $32.47 per unit for
the quarters ended September 30, 2002 and 2001, respectively.) Distributions for
the nine months ended September 30, 2002 and 2001, included $1,100,000 and
$1,200,000 in special distributions, respectively, as a result of the
distributions of net sales proceeds from the sale of several Properties and for
the nine months ended September 30, 2002, insurance proceeds, as described
above. The special distributions of $1,100,000 and $1,200,000, for the nine
months ended September 30, 2002 and 2001, were effectively a return of a portion
of the limited partners' investment, although, in accordance with the
Partnership agreement, $637,100 and $657,471 were applied toward the limited
partners' 10% Preferred Return and the balance of $462,900 and $542,529 were
treated as returns of capital for purposes of calculating the limited partners'
10% Preferred Return. As a result of the returns 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 Properties
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. Therefore,
distributions of net cash flow were adjusted commencing during the quarter ended
September 30, 2001, and once more commencing during the quarter ended September
30, 2002. No distributions were made to the general partners for the quarters
and nine months ended September 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.
In 2000, the Partnership discovered underground petroleum contamination
in the Property in Ocala, Florida. Therefore, the Partnership applied to a state
funded clean-up program. 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 has
accrued $75,000 of the estimated clean-up costs as a liability. During the nine
months ended September 30, 2002, phase one of the clean-up work commenced at the
site and the payment of the first installment was made.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Total rental revenues were $759,658 for the nine months ended September
30, 2002, as compared to $840,937 for the nine months ended September 30, 2001,
of which $226,595 and $280,141 were earned during the third quarter of 2002 and
2001, respectively. The decrease in rental revenues during the quarter and nine
months ended September 30, 2002, as compared to the same periods in 2001, was
primarily due to the 2002 and 2001 sales of the Properties in San Antonio and
Bay City, Texas, respectively. 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.
In June 2002, the lease for the Property in Pineville, Louisiana
expired. The Partnership will not receive any rental revenues from this vacant
Property until the Property is re-leased. The lost revenues resulting from the
expiration of this lease will have an adverse effect on the results of
operations of the Partnership if the Partnership is not able to re-lease the
Property in a timely manner. The Partnership is currently seeking replacement
tenant for this vacant Property.
During the nine months ended September 30, 2002 and 2001, the
Partnership earned $262,712 and $378,725, respectively, attributable to net
income earned by joint ventures, of which $85,247 and $166,977 were earned
during the quarters ended September 30, 2002 and 2001, respectively. The
decrease in net income earned by joint ventures during the quarter and nine
months ended September 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 nine months ended September 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 the Partnership distributing to the
limited partners the majority of the liquidating distribution received by the
Partnership from the joint venture.
The decrease in net income earned by joint ventures during the quarter
and nine months ended September 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.
During the nine months ended September 30, 2002, one of the
Partnership's lessees, Golden Corral Corporation, contributed more than 10% of
the Partnership's total rental revenues (including the Partnership's share of
rental revenues from Properties owned by joint ventures and Properties owned
with affiliates of the General Partners as tenants-in-common). It is anticipated
that based on the sale of the Property in Tomball, Texas, the anticipated sale
of the Property in Nederland, Texas and the lease expiration of the Property in
Pineville, Louisiana, no lessees will continue to contribute 10% or more of the
Partnership's total rental income during 2002. In addition, during the nine
months ended September 30, 2002, three Restaurant Chains, Golden Corral, Wendy's
and Pizza Hut, each accounted for more than 10% of the Partnership's total
rental revenues (including the Partnership's share of the rental revenues from
Properties owned by joint ventures and Properties owned with affiliates of the
General Partners as tenants-in-common). It is anticipated that only Wendy's and
Pizza Hut will each continue to account for more than 10% of the total rental
revenues to which the Partnership is entitled under the terms of its leases. Any
failure of these Restaurant Chains could materially affect the Partnership's
income if the Partnership is not able to re-lease the Properties in a timely
manner.
During the nine months ended September 30, 2002 and 2001, the
Partnership also earned $15,193 and $37,301, respectively, in interest and other
income, $10,351 and $19,803 of which were earned during the quarters ended
September 30, 2002 and 2001, respectively.
Operating expenses, including depreciation and amortization, and
provision for write-down of assets, were $524,278 and $413,625 for the nine
months ended September 30, 2002 and 2001, respectively, of which $97,332 and
$92,661 were incurred during the quarters ended September 30, 2002 and 2001,
respectively. The increase during the nine months ended September 30, 2002, as
compared to the same period in 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 did 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 nine months
ended September 30, 2002, as compared to the same period in 2001, was partially
offset by a decrease in the costs incurred for administrative expenses for
servicing the Partnership and its Properties and a decrease in depreciation
expense due to the fact that the Partnership sold Properties in 2002 and 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.
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. In September 2001, the Partnership
sold its Property in Bay City, Texas, to the tenant resulting in a gain of
approximately $204,200.
During the nine months ended September 30, 2002, the Partnership
identified four Properties that met the criteria of this standard. Three
properties were sold in August and October 2002, as described in "Capital
Resources." At September 30, 2002, the Partnership was negotiating an agreement
to sell the Property in Nederland, Texas with an unrelated third party. The
financial results of these Properties were classified as Discontinued Operations
in the accompanying financial statements. The Partnership distributed the
majority of the net sales proceeds from the sales in August to the limited
partners and anticipates that it will distribute the proceeds from the sale in
October and any subsequent Property sale.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
The general partners maintain a set of disclosure controls and
procedures designed to ensure that information required to be disclosed in the
Partnership'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 corporate general partner have evaluated the
Partnership's disclosure controls and procedures within 90 days prior to the
filing of this Quarterly Report on Form 10-Q and have determined that such
disclosure controls and procedures are effective.
Subsequent to the above evaluation, there were no significant changes
in internal controls or other factors that could significantly affect these
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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.
(Included as Exhibit 10.5 to Form 10-Q filed with
the Securities and Exchange Commission on August 14,
2002, and incorporated herein by reference.)
99.1 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. (Filed herewith.)
99.2 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. (Filed herewith.)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended September 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 7th day of November, 2002.
CNL INCOME FUND II, LTD.
By: CNL REALTY CORPORATION
General Partner
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 RULE 13a-14 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James M. Seneff, Jr., the Chief Executive Officer of CNL Realty
Corporation, the corporate general partner of CNL Income Fund II, Ltd. (the
"registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the
registrant;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures 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 quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 7, 2002
/s/ James M. Seneff, Jr.
- ---------------------------
James M. Seneff, Jr.
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
OF CORPORATE GENERAL PARTNER
PURSUANT TO RULE 13a-14 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert A. Bourne, President and Treasurer of CNL Realty Corporation,
the corporate general partner of CNL Income Fund II, Ltd. (the "registrant")
certify that:
1. I have reviewed this quarterly report on Form 10-Q of the
registrant;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures 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 quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 7, 2002
/s/ Robert A. Bourne
- ---------------------
Robert A. Bourne
President and Treasurer
EXHIBIT INDEX
Exhibit Number
(c) 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. (Included as Exhibit
10.5 to Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2002, and incorporated herein by
reference.)
99.1 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. (Filed herewith.)
99.2 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. (Filed herewith.)
EXHIBIT 99.1
EXHIBIT 99.2