UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to _____________ 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 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
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of limited partnership interest ($500 per Unit)
(Title of class)
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 check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. No [ X ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2): Yes___ No X
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 50,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market value for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
Item 1. Business
CNL Income Fund II, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on November 13, 1986. The general partners of the Partnership are Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on January 2, 1987, the
Partnership offered for sale up to $25,000,000 in limited partnership interests
(the "Units") (50,000 Units at $500 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended. The
offering terminated on August 21, 1987, as of which date the maximum offering
proceeds of $25,000,000 had been received from investors who were admitted to
the Partnership as limited partners (the "Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of selected national and regional fast-food restaurant chains (the
"Restaurant Chains"). Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totaled
$22,300,178, and were used to acquire, either directly or indirectly through
joint venture arrangements, 39 Properties.
As of December 31, 1999, the Partnership owned 37 Properties, either
directly or indirectly through joint venture or tenancy in common arrangements.
During 2000, the Partnership sold its Properties in Altamonte Springs, Apopka,
Jacksonville and Sanford, Florida. The proceeds from these sales were
distributed to the Limited partners as a special distribution. During the year
ended December 31, 2001, the Partnership sold its Property in Bay City, Texas,
and Peoria Joint Venture, in which the Partnership owns a 48% interest, sold its
Property to a third party. The Partnership received a liquidating distribution
from the net sales proceeds. The Partnership distributed the majority of the
liquidating distribution to the Limited Partners as a special distribution.
During 2002, the Partnership sold its Properties in Rock Springs, Wyoming;
Pineville, Louisiana; and San Antonio, and Tomball, Texas. In addition during
2002, the building related to the Property in Casper, Wyoming was partially
destroyed by fire, and the Partnership received insurance proceeds.
Subsequently, the Partnership demolished the building and sold the land of this
Property. The majority of the insurance and net sales proceed from these
Properties were distributed to the Limited Partners as a special distribution,
and the remaining proceeds were used to pay liabilities of the Partnership. As a
result of the above transactions, as of December 31, 2002, the Partnership owned
26 Properties. The 26 Properties include interests in three Properties owned by
joint ventures in which the Partnership is a co-venturer and six Properties
owned with affiliates as tenants-in-common. The lessee of the Properties
consisting of only land owns the buildings currently on the land, and the lessee
has the right, if not in default under the lease, to remove the buildings from
the land at the end of the lease terms. The Properties are generally leased on a
triple-net basis with the lessees responsible for all repairs and maintenance,
property taxes, insurance and utilities.
The Partnership holds its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations. Certain
lessees also have been granted options to purchase Properties, generally at the
Property's then fair market value after a specified portion of the lease term
has elapsed. The Partnership has no obligation to sell all or any portion of a
Property at any particular time, except as may be required under property
purchase options granted to certain lessees.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership and
joint ventures in which the Partnership is a co-venturer provide for initial
lease terms, ranging from five to 20 years (the average being 16 years), and
expire between 2004 and 2021. The leases are, in general, on a triple-net basis,
with the lessee responsible for all repairs and maintenance, property taxes,
insurance and utilities. The leases of the Properties provide for minimum base
annual rental payments (payable in monthly installments) ranging from
approximately $18,700 to $222,800. Generally, the leases provide for percentage
rent, based on sales in excess of a specified amount, to be paid annually. In
addition, certain leases provide for increases in the annual base rent during
the lease term.
Generally, the leases of the Properties provide for two to four
five-year renewal options subject to the same terms and conditions as the
initial lease. Lessees of 15 of the Partnership's 26 Properties also have been
granted options to purchase Properties at the Property's then fair market value
after a specified portion of the lease term has elapsed. Fair market value will
be determined through an appraisal by an independent appraisal firm. Under the
terms of certain leases, the option purchase price may equal the Partnership's
original cost to purchase the Property (including acquisition costs), plus a
specified percentage from the date of the lease or a specified percentage of the
Partnership's purchase price, if that amount is greater than the Property's fair
market value at the time the purchase option is exercised. A limited number of
leases provide for a purchase option price which is computed pursuant to a
formula based on various measures of value contained in an independent appraisal
of the Property.
The leases generally provide that, in the event the Partnership wishes
to sell the Property subject to a particular lease, the Partnership must first
offer the lessee the right to purchase the Property on the same terms and
conditions, and for the same price, as any offer which the Partnership has
received for the sale of the Property.
In January 2002, a tenant, Houlihan's Restaurant, Inc., filed for
bankruptcy and rejected the lease relating to the Property in Greensboro, North
Carolina, owned by Show Low Joint Venture. The joint venture is currently
seeking a new tenant for this Property.
During August 2002, the lease relating to the Golden Corral Property in
Nederland, Texas expired. The tenant has continued to operate under a
month-to-month lease until negotiations for a new contract with another
franchisee are finalized. The Partnership expects that the new tenant will
continue to operate as a Golden Corral with lease terms substantially the same
as the partnership's other leases.
Major Tenant
During 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). As of December 31, 2002, Golden Corral
Corporation was the lessee under leases relating to one restaurant. It is
anticipated that based on the sales of the Properties in Tomball, Texas and
Pineville, Louisiana, and the lease expiration of the Property in Nederland,
Texas, no lessees will continue to contribute 10% or more of the Partnership's
total rental revenues during 2003. In addition during 2002, two Restaurant
Chains, Golden Corral, and Wendy's, 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). In 2003, it is
anticipated that only Wendy's will continue to account for more than 10% of the
total rental revenues to which the Partnership is entitled under the terms of
its leases. A failure of this Restaurant Chain could materially affect the
Partnership's revenues if the Partnership is not able to re-lease the Properties
in a timely manner. As of December 31, 2002, no single tenant or group of
affiliated tenants leased Properties with an aggregate carrying value in excess
of 20% of the total assets of the Partnership.
Joint Venture and Tenancy in Common Arrangements
The partnership has entered into the following joint venture and
tenancy in common arrangements as of December 31, 2002:
Entity Name Year Ownership Partners Property
Kirkman Road Joint Venture 1987 50.00% CNL Income Fund VI, Ltd. Orlando, FL
Holland Joint Venture 1988 49.00 % CNL Income Fund IV, Ltd. Holland, MI
Show Low Joint Venture 1990 64.00% CNL Income Fund VI, Ltd. Greensboro, NC
CNL Income Fund II, Ltd. and 1994 33.87% CNL Income Fund XIII, Ltd. Arvada, CO
CNL Income Fund XIII,
Ltd. Tenants in Common
CNL Income Fund II, Ltd. and 1997 57.91% CNL Income Fund V, Ltd. Mesa, AZ
CNL Income Fund V, Ltd.
Tenants in Common
CNL Income Fund II, Ltd., and 1997 47.00% CNL Income Fund VII, Ltd. Smithfield, NC
CNL Income Fund VII,
Ltd. Tenants in Common
CNL Income Fund, Ltd., CNL 1997 37.01% CNL Income Fund, Ltd. Vancouver, WA
Income Fund II, Ltd., CNL Income Fund V, Ltd.
CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd.
and CNL Income Fund VI,
Ltd. Tenants in Common
CNL Income Fund II, Ltd., CNL 1998 39.39% CNL Income Fund III, Ltd. Overland Park, KS
Income Fund III, Ltd and CNL Income Fund VI, Ltd.
CNL Income Fund VI, Ltd.
Tenants in Common
CNL Income Fund II, Ltd., CNL 1998 13.38% CNL Income Fund VI, Ltd. Memphis, TN
Income Fund VI, Ltd. and CNL Income Fund XVI, Ltd.
CNL Income Fund XVI,
Ltd. Tenants in Common
Each joint venture or tenancy in common was formed to hold one
Property. Each CNL Income Fund is an affiliate of the General Partners and is a
limited partnership organized pursuant to the laws of the state of Florida. The
Partnership has management control of Kirkman Road Joint Venture, and shares
management control equally with the affiliates of the General Partners for the
other joint ventures.
The joint venture and tenancy in common arrangements provide for the
Partnership and its joint venture and tenancy in common partners to share in all
costs and benefits in proportion to each partner's percentage interest in the
business entity. The Partnership and its partners are also jointly and severally
liable for all debts, obligations and other liabilities of the joint venture or
tenancy in common. Net cash flow from operations is distributed to each joint
venture or tenancy in common partner in accordance with its respective
percentage interest in the business entity.
Each joint venture has an initial term of 20 years and, after the
expiration of the initial term, continues in existence from year to year unless
terminated at the option of either joint venturer or by an event of dissolution.
Events of dissolution include the bankruptcy, insolvency or termination of any
joint venturer, sale of the Property owned by the joint venture and mutual
agreement of the Partnership and its joint venture partners to dissolve the
joint venture. Any liquidation proceeds, after paying joint venture debts and
liabilities and funding reserves for contingent liabilities, will be distributed
first to the joint venture partners with positive capital account balances in
proportion to such balances until such balances equal zero, and thereafter in
proportion to each joint venture partner's percentage interest in the joint
venture.
The joint venture and tenancy in common agreements restrict each
party's ability to sell, transfer or assign its joint venture or tenancy in
common interest without first offering it for sale to its partners, either upon
such terms and conditions as to which the parties may agree or, in the event the
parties cannot agree, on the same terms and conditions as any offer from a third
party to purchase such joint venture or tenancy in common interest.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
Certain Management Services
RAI Restaurants, Inc. (formerly known as CNL Restaurants XVIII, Inc.),
an affiliate of the General Partners, provided certain services relating to
management of the Partnership and its Properties pursuant to a management
agreement with the Partnership. CNL APF Partners, LP assigned its rights in, and
its obligations under, the management agreement with the Partnership to RAI
Restaurants, Inc. ("Advisor") effective January 1, 2002. All of the terms and
conditions of the management agreement, including the payment of fees, remained
unchanged. Under this agreement, the Advisor is responsible for collecting
rental payments, inspecting the Properties and the tenants' books and records,
assisting the Partnership in responding to tenant inquiries and notices, and
providing information to the Partnership about the status of the leases and the
Properties. The Advisor also assists the General Partners in negotiating the
leases. For these services, the Partnership had agreed to pay the Advisor an
annual fee of one-half of one percent of Partnership assets (valued at cost)
under management, not to exceed the lesser of one percent of gross rental
revenues or competitive fees for comparable services. Under the property
management agreement, the property management fee is subordinated to receipt by
the Limited Partners of an aggregate, ten percent, cumulative, noncompounded
annual return on their adjusted capital contributions (the "10% Preferred
Return"), calculated in accordance with the Partnership's limited partnership
agreement (the "Partnership Agreement"). In any year in which the Limited
Partners have not received the 10% Preferred Return, no property management fee
will be paid.
The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
Competition
The fast-food and family-style restaurant business is characterized by
intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation and the officers and employees of American Properties Fund, Inc.,
the parent company of the Advisor, perform certain services for the Partnership.
In addition, the General Partners have available to them the resources and
expertise of the officers and employees of CNL Financial Group, Inc. a
diversified real estate company, and its affiliates, who may also perform
certain services for the Partnership.
Item 2. Properties
As of December 31, 2002, the Partnership owned 26 Properties. Of the 26
Properties, 17 are owned by the Partnership in fee simple, three are owned
through joint venture arrangements and six are owned through tenancy in common
arrangements. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its Partnership Agreement. More detailed information regarding the
location of the Properties is contained in the Schedule of Real Estate and
Accumulated Depreciation for the year ended December 31, 2002.
Description of Properties
Land. The Partnership's Property sites, owned directly and indirectly,
range from approximately 11,500 to 86,000 square feet depending upon building
size and local demographic factors. Sites purchased by the Partnership are in
locations zoned for commercial use which have been reviewed for traffic patterns
and volume.
The following table lists the Properties owned by the Partnership,
directly and indirectly, as of December 31, 2002 by state. More detailed
information regarding the location of the Properties is contained in the
Schedule of Real Estate and Accumulated Depreciation for the year ended December
31, 2002.
State Number of Properties
Alabama 2
Arizona 1
Colorado 2
Florida 2
Georgia 2
Illinois 1
Indiana 1
Kansas 1
Michigan 2
Minnesota 1
New Mexico 2
North Carolina 2
Tennessee 1
Texas 5
Washington 1
--------------
TOTAL PROPERTIES: 26
==============
Buildings. Each of the Properties owned by the Partnership, directly
and indirectly, includes a building that is one of a Restaurant Chain's approved
designs. However, the buildings located on the two Checkers Properties are owned
by the tenant while the land parcels are owned by the Partnership. The buildings
generally are rectangular and are constructed from various combinations of
stucco, steel, wood, brick and tile. The sizes of the buildings owned by the
Partnership range from approximately 1,300 to 9,900 square feet. All buildings
on Properties acquired by the Partnership are freestanding and surrounded by
paved parking areas. Buildings are suitable for conversion to various uses,
although modifications may be required prior to use for other than restaurant
operations. As of December 31, 2002, the Partnership had no plans for renovation
of the Properties. Depreciation expense is computed for buildings and
improvements using the straight line method using depreciable lives of 31.5 and
39 years for federal income tax purposes.
As of December 31, 2002, the aggregate cost of the Properties owned by
the Partnership and joint ventures (including Properties owned through tenancy
in common arrangements) for federal income tax purposes was $9,378,528 and
$10,881,691, respectively.
The following table lists the Properties owned by the Partnership,
directly and indirectly, as of December 31, 2002 by Restaurant Chain.
Restaurant Chain Number of Properties
Arby's 1
Checkers 2
Chevy's Fresh Mex 1
Darryl's 1
Del Taco 1
Denny's 1
Golden Corral 2
IHOP 2
Jack in the Box 1
KFC 1
Pizza Hut 5
Ponderosa 1
Popeyes 1
Wendy's 2
Other 4
--------------
TOTAL PROPERTIES 26
==============
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
Leases
The Partnership leases substantially all the Properties to operators of
selected national and regional fast-food Restaurant Chains. The Properties are
leased generally on a long-term "triple net" basis, meaning that the tenant is
responsible for repairs, maintenance, property taxes, utilities, and insurance.
As of December 31, 2002, 2001 and 2000, the Properties were 96%, 94%
and 97% occupied, respectively, and as of December 31, 1999 and 1998, the
Properties were fully occupied. The following is a schedule of the average rent
per Property for the years ended December 31:
2002 2001 2000 1999 1998
------------- ------------- -------------- ------------- --------------
Rental Revenues (1)(2) $ 1,532,701 $ 1,781,716 $ 2,142,668 $2,255,787 $2,337,182
Properties (2) 25 29 32 37 38
Average Rent Per Property
$ 61,308 $ 61,438 $ 66,958 $ 60,967 $ 61,505
(1) Rental revenues include the Partnership's share of rental revenues from
the Properties owned through joint venture and tenancy in common
arrangements.
(2) Excludes Properties that were vacant at December 31, and did not
generate rental revenues during the year ended December 31.
The following is a schedule of lease expirations for leases in place as
of December 31, 2002, for each of the next ten years and thereafter.
Percentage of
Expiration Number Annual Rental Gross Annual
Year of Leases Revenues Rental Income
----------------- ---------------- --------------------- --------------------------
2003 -- $ -- --
2004 1 96,600 7.13%
2005 2 65,502 4.83%
2006 1 63,193 4.66%
2007 8 445,083 32.85%
2008 1 43,200 3.19%
2009 -- -- --
2010 -- -- --
2011 2 147,291 10.87%
2012 2 162,744 12.01%
Thereafter 7 331,376 24.46%
---------- ------------- -------------
Totals (1) 24 $ 1,354,989 100.00%
========== ============= =============
(1) Excludes two Properties, one which was vacant at December 31, 2002, and
the Property in Nederland, Texas for which the lease has expired and
the tenant has continued to operate under a month-to-month lease until
negotiations for a new contract with another franchisee are finalized.
Leases with Major Tenant
The terms of the leases with the Partnership's major tenant as of
December 31, 2002 (see Item 1. Business - Major Tenant), are substantially the
same as those described in Item 1. Business - Leases.
Golden Corral Corporation leases one Golden Corral restaurant. The
initial term of this lease is 15 years (expiring in 2012) and the minimum base
annual rent is approximately $152,700.
It is anticipated that based on the sale of the Property in Tomball,
Texas and Pineville, Louisiana, and the lease expiration of the Property in
Nederland, Texas, no lessees will continue to contribute 10% or more of the
Partnership's total rental revenues during 2003.
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners or any affiliate of
the General Partners, nor any of their respective Properties, is party to, or
subject to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of March 10, 2003, there were 2,168 holders of record of the Units.
There is no public trading market for the Units and it is not anticipated that a
public market for the Units will develop. During 2002, Limited Partners who
wished to sell their Units may have offered the Units for sale pursuant to the
Partnership's distribution reinvestment plan (the "Plan"), and Limited Partners
who wished to have their distributions used to acquire additional Units (to the
extent Units were available for purchase), may have done so pursuant to such
Plan. The General Partners have the right to prohibit transfers of Units. From
inception through June 30, 2000, the price paid for any Unit transferred
pursuant to the Plan ranged from $436.20 to $475 per Unit. From July 2000
through December 2002, due primarily to the sales of Properties, the price paid
for any Unit transferred pursuant to the Plan ranged from $400 to $425 per Unit.
The price paid for any Unit transferred other than pursuant to the Plan was
subject to negotiation by the purchaser and the selling Limited Partner. The
Partnership will not redeem or repurchase Units.
The following table reflects, for each calendar quarter, the high, low
and average sales prices for transfers of Units during 2002 and 2001 other than
pursuant to the Plan, net of commissions.
2002 (1) 2001 (1)
----------------------------------- ------------------------------------
High Low Average High Low Average
--------- -------- ---------- ---------- --------- ----------
First Quarter $ 280 $198 $ 227 $ 270 $232 $ 254
Second Quarter 275 215 249 192 192 192
Third Quarter 252 215 225 300 271 284
Fourth Quarter 300 276 290 267 267 267
(1) A total of 582 and 126 Units were transferred other than pursuant to
the Plan for the years ended December 31, 2002 and 2001, respectively.
The capital contribution per Unit was $500. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
During the years ended December 31, 2002 and 2001, the Partnership
declared distributions to the limited partners of $3,124,909 and $2,913,650,
respectively. Distributions for the year ended December 31, 2002 and 2001,
included $1,600,000 and $1,200,000 in special distributions, as a result of the
distributions of net sales proceeds from the sales of several properties, and
for 2002, distributions of insurance proceeds on casualty loss. These special
distributions were effectively a return of a portion of the limited partners'
investment, although, in accordance with the Partnership agreement, $866,124 and
$657,471 were applied toward the limited partners' 10% Preferred Return and the
balances of $733,876 and $542,529 were 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 accordingly. As a result of the sale of the properties in 2002 and
2001, the Partnership's total revenue has decreased, while the majority of the
Partnership's operating expenses remained fixed. Therefore, distributions of net
cash flow have been adjusted in the quarters ended September 30, 2001 and 2002,
and the quarter ended December 31, 2002, and are expected to remain reduced in
subsequent years. No distributions have been made to the general partners to
date. As indicated in the chart below, the distributions were declared at the
close of each of the Partnership's calendar quarters. These amounts include
monthly distributions made in arrears for the Limited Partners electing to
receive such distributions on this basis.
Quarter Ended 2002 2001
------------------------- --------------- ----------------
March 31 $ 423,496 $ 433,329
June 30 1,123,496 433,329
September 30 743,537 1,623,496
December 31 834,380 423,496
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although the General Partners, in their sole discretion, may elect to pay
distributions monthly.
(b) Not applicable
Item 6. Selected Financial Data
2002 2001 2000 1999 1998
------------- -------------- ------------- ------------ ------------
Year ended December 31:
Continuing Operations (3):
Revenues $ 1,141,803 $ 1245,141 $1,397,091 $1,489,651 $1,571,832
Equity in earnings of joint
venture 253,111 441,969 443,567 440,215 431,974
Income from continuing
operations (1) 1,095,542 1,442,574 2,099,613 1,474,822 1,465,454
Discontinued Operations (3):
Revenues 83,134 177,623 268,444 314,523 333,608
Income (loss) from discontinued
operations (2) (417,496 ) (188,828 ) 175,956 224,556 268,285
Net income 678,046 1,253,746 2,275,569 1,699,378 1,733,739
Net income (loss) per Unit:
Continuing operations $ 21.91 $ 28.85 $ 41.99 $ 29.50 $ 29.30
Discontinued operations (8.35 ) (3.78 ) 3.52 4.49 5.37
------------- -------------- ------------- ------------ ------------
Total $ 13.56 $ 25.07 $ 45.51 $ 33.99 $ 34.67
============= ============== ============= ============ ============
Cash distributions declared (4) $ 3,124,909 $ 2,913,650 $4,397,916 $2,062,516 $3,294,507
Cash distributions declared per
Unit (4) 62.50 58.27 87.96 41.25 65.89
At December 31:
Total assets $ 12,242,594 $ 14,193,243 $15,833,995 $18,026,218 $18,392,911
Partners' capital 11,048,629 13,495,492 15,155,396 17,277,743 17,640,881
(1) Income from continuing operations for the years ended December 31,
2002, 2001, 2000 and 1999, includes $133,603, $204,179, $766,913 and
$192,752, respectively, from gain on sale of assets. In addition,
income from continuing operations for the year ended December 31, 1999,
includes $79,585 from a loss on sale of assets. Income from continuing
operations for the years ended December 31, 2002, 2001, 2000 and 1998
has been reduced by real estate disposition fees of $22,500, $16,620,
$71,056 and $45,150 as a result of the sales of several Properties.
Income from continuing operations for the years ended December 31,
2001, also includes lease termination income of $13,112.
(2) Income from discontinued operations for the year ended December 31,
2002 includes provisions for write-down of assets of $498,312 partially
offset by insurance proceeds of $88,777, which the Partnership recorded
as an adjustment to the loss incurred in a Property destroyed by fire.
Income from discontinued operations for the year ended December 31,
2002 also includes losses on sale of assets of $25,967. Income from
discontinued operations for the year ended December 31, 2001 includes
provisions for write-down of assets of $223,550. Loss from discontinued
operations for the year ended December 31, 2002 has been increased by
real estate disposition fees of $32,829 as a result of the sales of
several Properties.
(3) Certain items in the prior year's financial statements have been
reclassified to conform to 2002 presentation. These reclassifications
had no effect on total net income. The results of operations relating
to properties that were either disposed of or were classified as held
for sale as of December 31, 2002 are reported as discontinued
operations. The results of operations relating to properties that were
identified for sale as of December 31, 2001 but sold subsequently are
reported as continuing operations.
(4) Distributions for the years ended December 31, 2002, 2001, 2000, and
1998 include special distributions to the Limited Partners of
$1,600,000, $1,200,000, $2,500,000 and $1,232,003 as a result of the
distributions of the net sales proceeds from the 2002, 2001, 2000 and
1997 sales of several Properties and distribution of insurance proceeds
received in 2002.
The above selected financial data should be read in conjunction with
the financial statements and related notes contained in Item 8 hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Partnership 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
restaurant Properties were to be constructed, which are leased primarily to
operators of selected national and regional fast-food Restaurant Chains. The
leases are, in general, triple-net leases, with the lessees responsible for all
repairs and maintenance, property taxes, insurance and utilities. The leases
provide for minimum base annual rental amounts (payable in monthly installments)
ranging from approximately $18,700 to $222,800. The majority of the leases
provide for percentage rent, based on sales in excess of a specified amount. In
addition, some of the leases provide that, commencing in specified lease years
(generally the sixth lease year), the annual base rent required under the terms
of the lease will increase.
The Partnership owned 23, 22 and 17 Properties directly as of December
31, 2000, 2001 and 2002, respectively. In addition, the Partnership owned as of
December 31, 2000 ten Properties indirectly through joint venture or tenancy in
common arrangements, and nine Properties in 2001 and 2002.
Capital Resources
For the years ended December 31, 2002, 2001 and 2000, cash from
operating activities was $1,334,027, $1,671,766 and $1,741,141, respectively.
The decrease in cash from operating activities during 2002 and 2001, as compared
to the same period in the previous year resulted from changes in the
Partnership's working capital and changes in income and expenses.
Other sources and uses of cash included the following during the years
ended December 31, 2002, 2001, and 2000.
Underground petroleum contamination was discovered in 2000 relating to
a Property in Ocala, Florida. The Partnership applied to, and qualified for
assistance from, a state funded clean-up program. Under this program, the
Partnership is responsible for 25% of the actual clean-up costs and is receiving
assistance for the remaining 75% of the costs. The Partnership anticipated that
future clean-up costs would be approximately $300,000 and accrued in 2000, as a
liability, the $75,000 of the estimated clean-up costs. The project is expected
to be completed in five phases. During the year ended December 31, 2002, phase
one of the clean-up work commenced at the site and payment of the first
installment was made. The work for this phase was finalized, and the Department
of Environmental Protection approved the conclusions. During the first quarter
of 2003, phase two of the clean-up work commenced.
During 2002, 2001 and 2000, the Partnership distributed to the Limited
Partners the majority of the insurance proceeds from a 2001 loss due to fire,
liquidating proceeds from a 2001 dissolution of a joint venture, and net sales
proceeds from sales of Properties in 2000, 2001 and 2002, except as indicated.
These transactions are described below.
During 2000, the Partnership sold four of its Properties, one in each
of Jacksonville, Apopka, Sanford and Altamonte Springs, Florida, and received
total net sales proceeds of approximately $2,290,000, resulting in a total gain
of $766,913.
In August 2001, Peoria Joint Venture, in which the Partnership owned a
48% interest, sold its Property to a third party for approximately $1,786,900
resulting in a gain of approximately $136,700. The Partnership received
approximately $830,300 as a return of capital representing its 48% share of the
liquidation proceeds of the joint venture. In September 2001, Peoria Joint
Venture was dissolved in accordance with the joint venture agreement. No gain or
loss on the dissolution of the joint venture was incurred.
In September 2001, the Partnership sold its Property in Bay City,
Texas, to the tenant and received net sales proceeds of approximately $548,900,
resulting in a gain of $204,179.
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 estimated 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 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 because in October, 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 estimated fair value. In August 2002, the Partnership sold the property
to a third 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
$747,500, resulting in a gain of approximately $133,600.
In June 2002, the Partnership recorded a provision for write-down of
assets of $181,231 relating to the Property in Pineville, Louisiana since 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. In December 2002, the Partnership
sold this Property and received net sales proceeds of approximately $262,400.
Since the Partnership had recorded a provision for write-down for this Property,
no additional gain or loss was recognized on the sale. In September 2002, the
Partnership recorded a provision for write-down of assets of $139,752 relating
to the Property in Tomball, Texas in anticipation of the sale of this Property.
The provision represented the difference between the carrying value of the
Property and its estimated fair value. This Property was vacant since the tenant
opted to not renew its lease, which expired in May 2002. In October 2002, the
Partnership sold to an unrelated third party the Property and received net sales
proceeds of approximately $458,200. Since the Partnership had recorded a
provision for write-down for this Property, no additional gain or loss was
recognized on the sale. The Partnership distributed to the Limited Partners a
portion of the net proceeds from the sales of these two Properties, and used the
remaining proceeds to pay liabilities of the Partnership.
In connection with the sales of the properties in 2002, 2001 and 2000,
the Partnership incurred deferred, subordinated, real estate disposition fees of
$55,329, $16,620 and $71,056. 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.
None of the Properties owned by the Partnership, or the joint ventures
or tenancy in common arrangements in which the Partnership owns an interest, is
or may be encumbered. Subject to certain restrictions on borrowing from the
General Partners, however, the Partnership may borrow, in the discretion of the
General Partners, for the purpose of maintaining the operations and paying
liabilities of the Partnership including quarterly distributions. The
Partnership will not borrow for the purpose of returning capital to the Limited
Partners. The Partnership will not encumber any of the Properties in connection
with any borrowing or advances. The Partnership also will not borrow under
circumstances which would make the Limited Partners liable to creditors of the
Partnership. Affiliates of the General Partners from time to time incur certain
operating expenses on behalf of the Partnership for which the Partnership
reimburses the affiliates without interest.
Currently, rental income from the Partnership's Properties are invested
in 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 use of such funds to pay Partnership
expenses, or to make distributions to partners. At December 31, 2002, the
Partnership had $1,193,910 invested in such short-term investments as compared
to $559,886 at December 31, 2001. The increase in short-term investments at
December 31, 2002, as compared to December 31, 2001, was primarily attributable
to the receipt of net sales proceeds from the sale of several Properties pending
distribution to the limited partners. As of December 31, 2002, the average
interest rate earned by the Partnership on the rental income deposited in demand
deposit accounts at commercial banks was approximately 1.35% annually. The funds
remaining at December 31, 2002, will be used to pay distributions and other
liabilities of the Partnership.
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 continue to 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.
Due to low operating expenses and ongoing cash flow, the General
Partners do not believe that working capital reserves are necessary at this
time. In addition, because the leases for the Partnership's Properties are
generally on a triple-net basis, it is not anticipated that a permanent reserve
for maintenance and repairs will be established at this time. To the extent,
however, that the Partnership has insufficient funds for such purposes, the
General Partners will contribute to the Partnership an aggregate amount of up to
one percent of the offering proceeds for maintenance and repairs.
In July 2001, the Partnership entered into a promissory note with the
corporate General Partner for a loan in the amount of $75,000 in connection with
the operations of the Partnership. The loan was uncollateralized, non-interest
bearing and due on demand. In August 2001, the Partnership had repaid the entire
loan to the corporate general partner.
The Partnership generally distributes cash from operating activities
remaining after the payment of the operating expenses of the Partnership, to the
extent that the General Partners determine that such funds are available for
distribution. Based primarily on current and anticipated future cash from
operations, the insurance proceeds received in 2002, and the majority of the net
sales proceeds received from the sales of Properties during 2002, 2001 and 2000,
the Partnership declared distributions to the Limited Partners of $3,124,909,
$2,913,650, and $4,397,916, for years ended December 31, 2002, 2001 and 2000,
respectively. This represents distributions of $62.50, $58.27, and $66.12, per
Unit for the years ending in December 31, 2002, 2001 and 2000, respectively.
Distributions for the year ended December 31, 2002, 2001 and 2000, included
$1,600,000, $1,200,000 and $2,500,000 in special distributions, as a result of
the distributions of the majority of the net sales proceeds from the sales of
several Properties and distribution of insurance proceeds received in 2002.
These special distributions were effectively a return of a portion of the
Limited Partners' investment, although, in accordance with the Partnership
agreement, $866,124, $657,471 and $1,407,878 were applied toward the Limited
Partners' 10% Preferred Return and the balances of $733,876, $542,529 and
$1,092,122 were 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
accordingly. As a result of the sales of the Properties in 2002, 2001 and 2000,
the Partnership's total revenue has decreased, while the majority of the
Partnership's operating expenses remained fixed. Therefore, distributions of net
cash flow have been adjusted in the quarter ended September 30, 2000, with
subsequent adjustments in the quarters ended September 30, 2001 and 2002, and
the quarter ended December 31, 2002. No distributions were made to the General
Partners for the years ended December 31, 2002, 2001 and 2000. The Partnership
intends to continue to make distributions of cash available for distribution to
the Limited Partners on a quarterly basis.
During 2000, the General Partners waived their right to receive future
distributions from the Partnership, including both distributions of operating
cash flow and distributions of liquidation proceeds, to the extent that the
cumulative amount of such distributions would exceed the balance in the General
Partners' capital account as of December 31, 1999. Accordingly, the General
Partners were not allocated any net income and did not receive any distributions
during the years ended December 31, 2002, 2001 and 2000.
As of December 31, 2002 and 2001, the Partnership owed $12,381 and
$3,812, respectively, to affiliates for operating expenses and accounting and
administrative services. As of March 15, 2003, the Partnership had reimbursed
the affiliates for these amounts. In addition, the years ended December 31, 2002
and 2001, the Partnership incurred $ 55,329 and $16,620, respectively, in real
estate disposition fees due to an affiliate as a result of its services in
connection with the 2002 and 2001 sales, respectively, of several Properties.
The payment of the real estate disposition fees is deferred until the Limited
Partners have received their cumulative 10% Preferred Return and their adjusted
capital contributions. Other liabilities, including distributions payable,
increased to $993,429 at December 31, 2002, from $561,113 at December 31, 2001,
primarily as a result of accruing a special distribution for the Limited
Partners of $500,000 relating to net sales proceeds from the sale of three
Properties. Total liabilities at December 31, 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' contributions
or loans.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Critical Accounting Policies
The Partnership's leases are accounted for under the provisions of
Statement of Accounting Standard No. 13, "Accounting for Leases" ("FAS 13"), and
have been accounted for using either the direct financing or the operating
method. FAS 13 requires management to estimate the economic life of the leased
property, the residual value of the leased property and the present value of
minimum lease payments to be received from the tenant. In addition, management
assumes that all payments to be received under its leases are collectible.
Changes in management's estimates or assumptions regarding collectibility of
lease payments could result in a change in accounting for the lease at the
inception of the lease.
The Partnership accounts for its unconsolidated joint ventures using
the equity method of accounting. Under generally accepted accounting principles,
the equity method of accounting is appropriate for entities that are partially
owned by the Partnership, but for which operations of the investee are shared
with other partners. The Partnership's joint venture agreements require the
consent of all partners on all key decisions affecting the operations of the
underlying Property.
Management reviews the Partnership's Properties and investments in
unconsolidated entities periodically for impairment at least once a year or
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The assessment is based on the carrying amount
of the Property or investment at the date it is tested for recoverability
compared to the sum of the estimated future cash flows expected to result from
its operation and sale through the expected holding period. If an impairment is
indicated, the asset is adjusted to its estimated fair value.
When the Partnership makes the decision to sell or commits to a plan to
sell a Property, its operating results are reported as discontinued operations.
Results of Operations
Comparison of the year ended December 31, 2002 to the year ended December 31,
2001
Total rental revenues were $1,035,106 for the year ended December 31,
2002 as compared to $1,118,018 during the same period in 2001. The decrease in
rental revenues during 2002 was primarily due to the sales of the Properties in
San Antonio and Bay City, Texas in 2002 and 2001, 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.
During 2001, the former lease for the Property in Hueytown, Alabama,
which was scheduled to expire in June 2002, was terminated by the Partnership
and the tenant. In November 2001, the Partnership re-leased the Property in
Hueytown, Alabama to a new tenant with terms substantially the same as the
Partnership's other leases. Rents due under the new lease are lower than rents
due under the previous lease; therefore, the Partnership expects that rental
revenues in future periods will remain at reduced amounts. However, the General
Partners do not anticipate that any decrease in rental revenues relating to the
new lease with lower rents will have a material adverse effect on the
Partnership's financial position or results of operations. In connection with
the termination of this lease, the Partnership recognized $13,112 in lease
termination income.
During the year ended December 31, 2002 and 2001, the Partnership also
earned $89,048 and $72,771, respectively, in contingent rental income. The
increase was primarily attributable to an increase in gross sales of certain
restaurant Properties, the lease of which require the payment of contingent
rental income.
During the year ended December 31, 2002 and 2001, the Partnership
earned $253,111 and $441,969, respectively, attributable to the net income
earned by joint ventures. The decrease in net income earned by joint ventures
during 2002, 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 recorded a provision for write-down
of assets of approximately $172,200. The provision represented the difference
between the carrying value of the Property and its estimated fair value. 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 earned by joint ventures during 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 2002, was
partially offset because the Partnership and CNL Income Fund V, Ltd., as
tenants-in-common, re-leased the Property in Mesa, Arizona which was vacant
since June 2000, to a new tenant in September 2001 with terms substantially the
same as the Partnership's other leases. In 1998, the tenant of the Property, in
Mesa, Arizona, in which the Partnership owns an approximate 58% interest, filed
for bankruptcy, and during 2000, rejected its lease relating to this Property.
As a result, this tenant discontinued making rental payments on the rejected
lease.
During 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). As of December 31, 2002, Golden Corral
Corporation was the lessee under leases relating to one restaurant. It is
anticipated that based on the sales of the Properties in Tomball, Texas and
Pineville, Louisiana, and the lease expiration of the Property in Nederland,
Texas, no lessees will continue to contribute 10% or more of the Partnership's
total rental revenues during 2003. In addition during 2002, two Restaurant
Chains, Golden Corral, and Wendy's, 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). In 2003, it is
anticipated that only Wendy's will continue to account for more than 10% of the
total rental revenues to which the Partnership is entitled under the terms of
its leases. A failure of this Restaurant Chain could materially affect the
Partnership's revenues if the Partnership is not able to re-lease the Properties
in a timely manner.
During the year ended December 31, 2002 and 2001, the Partnership also
earned $17,649 and $41,240, respectively, in interest and other income. Interest
and other income during 2001 were higher because the Partnership earned interest
on higher average cash balances due to the net sales proceeds received from the
sale of Properties pending distribution to the Limited Partners.
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets, were $432,975 and $448,715 for the years
ended December 31, 2002 and 2001, respectively. The decrease in operating
expenses is primarily due to a decrease in depreciation expense because 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 estimated 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 2002, the Partnership sold four Properties that met the criteria
of this standard. 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 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 the loss incurred in this Property due to fire. 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 the provision for write-down of the property. At June 2002, in
connection with the anticipated sale of the land, the Partnership recorded a
provision for write-down of assets of $63,714. The provision represented the
difference between the carrying value of the land and its estimated fair value.
In August 2002, the Partnership sold the land to a third party resulting in an
additional provision for write- down 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 because 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. In addition at June 2002, in connection with the
anticipated sale of this property, the Partnership recorded a provision for
write-down of assets of $113,615. The provision represented the difference
between the carrying value of the property and its estimated fair value. In
August 2002, the Partnership sold the Property to a third party resulting in a
loss on disposal of assets of $15,341
In June 2002, the Partnership recorded a provision for write-down of
assets of $181,231 relating to the Property in Pineville, Louisiana since 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. In December 2002, the Partnership
sold this Property. Since the Partnership had recorded a provision for
write-down of assets for this Property, no additional gain or loss was
recognized on the sale.
In September 2002, the Partnership recorded a provision for write-down
of assets of $139,752 relating to the Property in Tomball, Texas in anticipation
of the sale of this Property. The provision represented the difference between
the carrying value of the Property and its estimated fair value. This Property
was vacant since the tenant opted to not renew its lease, which expired in May
2002. In October 2002, the Partnership sold the Property to a third party. Since
the Partnership had recorded a provision for write-down for this Property, no
additional gain or loss was recognized on the sale.
The Partnership was negotiating a contract with an unrelated party to
sell the Property in Nederland, Texas at September 2002. The negotiations were
terminated during the fourth quarter of 2002 and as a result, the Partnership
reclassified the assets from real estate held for sale to real estate properties
with operating leases.
The financial results of the Properties, in Casper and Rock Springs,
Wyoming; Pineville, Louisiana and Tomball, Texas, were classified as
Discontinued Operations in the accompanying financial statements. The
Partnership distributed the majority of the net sales proceeds from the sales to
the Limited Partners and used the remainder to pay liabilities of the
Partnership.
Comparison of the year ended December 31, 2001 to the year ended December 31,
2000
Total rental revenues were $1,118,018 for the year ended December 31,
2001 as compared to $1,290,647 in the same period in 2000. The decrease in
rental revenues during 2001, as compared to the previous year, was primarily a
result of the sales of several Properties during 2001 and 2000. Rental revenues
earned from wholly owned Properties is expected to remain at reduced amounts as
a result of the Partnership distributing the net sales proceeds to the Limited
Partners as special distributions.
During 2001, the former lease for the Property in Hueytown, Alabama,
which was scheduled to expire in June 2002, was terminated by the Partnership
and the tenant. In November 2001, the Partnership re-leased the Property in
Hueytown, Alabama to a new tenant, as described above.
During the years ended December 31, 2001 and 2000, the Partnership also
earned $72,771 and $48,854, respectively, in contingent rental income. The
increase in contingent rental income during 2001, as compared to the previous
year, was primarily attributable to an increase in gross sales of certain
restaurant Properties, the leases of which require the payment of contingent
rental income.
The Partnership earned $441,969 and $443,567 attributable to the net
income earned by joint ventures during the years ended December 31, 2001 and
2000, respectively. The decrease in net income earned by joint ventures during
2001 was partially due to the fact that, Houlihan's Restaurant, Inc., who leases
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 recorded a provision for write-down of assets of
approximately $56,400 relating to this Property in 2001. The provision
represented the difference between the carrying value of the Property and its
estimated fair value.
The tenant of the Property, in Mesa, Arizona, in which the Partnership
owns an approximate 58% interest, filed for bankruptcy in 1998, and during 2000,
rejected its lease relating to this Property. As a result, the tenants-in-common
stopped recording rental revenues in 2000 and recorded a provision for
write-down of assets for approximately $31,500. The provision represented the
difference between the carrying value of the Property at December 31, 2000 and
its estimated fair value. The Partnership and CNL Income Fund V, Ltd., as
tenants-in-common, re-leased the Property to a new tenant in September 2001.
The decrease in net income during 2001, as compared to 2000, was
partially offset by the fact that in August 2001, Peoria Joint Venture, in which
the Partnership owned a 48% interest, sold its Property to a third party for
approximately $1,786,900 resulting in a gain to the joint venture of
approximately $136,700. The Partnership dissolved the joint venture in
accordance with the joint venture agreement and did not incur a gain or loss on
the dissolution. The Partnership expects that net income earned by joint
ventures will remain at reduced levels as a result of the distributions of the
liquidating proceeds to the Limited Partners.
During the years ended December 31, 2001 and 2000, the Partnership also
earned $41,240 and $57,590, respectively, in interest and other income. Interest
and other income during 2000 were higher because the Partnership earned interest
on higher average cash balances due to the net sales proceeds received from the
sale of Properties pending distribution to the Limited Partners.
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets, were $448,715 and $507,958 for the years
ended December 31, 2001 and 2000, respectively. The decrease in operating
expenses is partially due to a decrease in depreciation expense because the
Partnership sold several Properties in 2001 and 2000 and distributed the net
sales proceeds to the Limited Partners.
During 2000, the Partnership recorded $75,000 in estimated
environmental clean-up costs relating to the contamination of the Property in
Ocala, Florida. During 2000, the Partnership also incurred $31,418 in
transaction costs related to the General Partners retaining financial and legal
advisors to assist them in evaluating and negotiating a proposed merger with CNL
American Properties Fund, Inc. ("APF"). On March 1, 2000, the General Partners
and APF mutually agreed to terminate the merger.
The decrease in operating expenses during 2001, as compared to 2000,
was partially offset by an increase in the costs incurred for administrative
expenses for servicing the Partnership and its Properties, as permitted by the
Partnership agreement.
In September 2001, the Partnership sold its Property in Bay City, Texas
to the tenant resulting in a gain of $204,179. In addition, the Partnership
recognized gains totaling $766,913 during 2000 as a result of the sales of four
Properties.
The restaurant industry has been relatively resilient during this
volatile time with steady performance during 2002. However, the industry remains
in a state of cautious optimism. Restaurant operators expect their business to
be better in 2003, according to a nationwide survey conducted by the National
Restaurant Association, but are concerned by the budget deficits being
experienced by many states and the potential of new taxes on the industry to
alleviate the situation.
The Partnership's leases as of December 31, 2002 are generally
triple-net leases and contain provisions that the General Partners believe
mitigate the adverse effect of inflation. Such provisions include clauses
requiring the payment of percentage rent based on certain restaurant sales above
a specified level and/or automatic increases in base rent at specified times
during the term of the lease. Inflation, overall, has had a minimal effect on
results of operations of the Partnership. Continued inflation may cause capital
appreciation of the Partnership's Properties. Inflation and changing prices,
however, also may have an adverse impact on the sales of the restaurants and on
potential capital appreciation of the Properties.
In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" to expand upon and strengthen
existing accounting guidance that addresses when a company should include the
assets, liabilities and activities of another entity in its financial
statements. To improve financial reporting by companies involved with variable
interest entities (more commonly referred to as special-purpose entities or
off-balance sheet structures), FIN 46 requires that a variable interest entity
be considered 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. Consolidation of variable
interests entities will provide more complete information about the resources,
obligations, risks and opportunities of the consolidated company. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003, and to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Management believes
adoption of this standard may result in either consolidation or additional
disclosure requirements with respect to the Partnership's unconsolidated joint
ventures or Properties held with affiliates of the General Partners as
tenants-in-common, which are currently accounted for under the equity method.
However, such consolidation is not expected to significantly impact the
Partnership's results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
Report of Independent Certified Public Accountants 20
Financial Statements:
Balance Sheets 21
Statements of Income 22
Statements of Partners' Capital 23
Statements of Cash Flows 24-25
Notes to Financial Statements 26-38
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund II, Ltd.
In our opinion, the accompanying balance sheets and the related statements of
income, of partners' capital and of cash flows present fairly, in all material
respects, the financial position of CNL Income Fund II, Ltd. (a Florida limited
partnership) at December 31, 2002 and 2001 and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2002
in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedules
listed in the index appearing under item 15(a)(2) present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements. These financial statements and financial
statement schedules are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, on January 1, 2002, the
Partnership adopted Statement of Financial Accounting Standard No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 31, 2003
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2002 2001
----------------- -----------------
ASSETS
Real estate properties with operating leases, net $ 6,752,686 $ 7,500,419
Real estate held for sale -- 1,555,397
Investment in joint ventures 4,000,984 4,154,855
Cash and cash equivalents 1,193,910 559,886
Certificate of deposit 61,824 62,248
Receivables, less allowance for doubtful accounts of
$23,640, in 2001 43,505 153,086
Accrued rental income 182,640 203,759
Other assets 7,045 3,593
----------------- -----------------
$ 12,242,594 $ 14,193,243
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 71,100 $ 83,096
Real estate taxes payable 8,720 9,093
Distributions payable 834,380 423,496
Due to related parties 200,536 136,638
Rents paid in advance and deposits 79,229 45,428
----------------- -----------------
Total liabilities 1,193,965 697,751
Commitments and Contingencies (Note 9)
Partners' capital 11,048,629 13,495,492
----------------- -----------------
$ 12,242,594 $ 14,193,243
================= =================
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2002 2001 2000
---------------- --------------- ----------------
Revenues:
Rental income from operating leases $ 1,035,106 $ 1,118,018 $ 1,290,647
Contingent rental income 89,048 72,771 48,854
Lease termination income -- 13,112 --
Interest and other income 17,649 41,240 57,590
----------------
---------------- ---------------
1,141,803 1,245,141 1,397,091
---------------- --------------- ----------------
Expenses:
General operating and administrative 210,517 212,108 147,122
Property expenses 24,937 16,485 11,486
State and other taxes 15,666 18,223 9,414
Depreciation and amortization 181,855 201,899 233,518
Transaction costs -- -- 31,418
Environmental clean-up costs -- -- 75,000
---------------- --------------- ----------------
432,975 448,715 507,958
---------------- --------------- ----------------
Income Before Gain on Sale of Assets and Equity in
Earnings of Joint Ventures 708,828 796,426 889,133
Gain on Sale of Assets 133,603 204,179 766,913
Equity in Earnings of Joint Ventures 253,111 441,969 443,567
---------------- --------------- ----------------
Income from Continuing Operations 1,095,542 1,442,574 2,099,613
---------------- --------------- ----------------
Discontinued Operations (Note 4):
Income (loss) from discontinued operations (391,529 ) (188,828 ) 175,956
Loss on disposal of discontinued operations (25,967 ) -- --
---------------- --------------- ----------------
(417,496 ) (188,828 ) 175,956
---------------- --------------- ----------------
Net Income $ 678,046 $ 1,253,746 $ 2,275,569
================ =============== ================
Income (Loss) Per Limited Partner Unit
Continuing Operations $ 21.91 $ 28.85 $ 41.99
Discontinued Operations (8.35 ) (3.78 ) 3.52
---------------- --------------- ----------------
Total $ 13.56 $ 25.07 $ 45.51
================ =============== ================
Weighted Average Number of Limited Partner Units
Outstanding 50,000 50,000 50,000
================ =============== ================
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2002, 2001, and 2000
General Partners Limited Partners
----------------------------- ------------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs
-------------- ------------ -------------- ------------- ------------- -----------
Balance, December 31, 1999 $ 162,000 $ 243,788 $ 25,000,000 $ (30,426,400 ) $ 24,988,177 $ (2,689,822 )
Distributions to limited
partners ($87.96 per
limited partner unit) -- -- (1,092,122 ) (3,305,794 ) -- --
Net income -- -- -- -- 2,275,569 --
-------------- ------------- --------------- -------------- -------------- -------------
Balance, December 31, 2000 162,000 243,788 23,907,878 (33,732,194 ) 27,263,746 (2,689,822 )
Distributions to limited
partners ($58.27 per
limited partner unit) -- -- (542,529 ) (2,371,121 ) -- --
Net income -- -- -- -- 1,253,746 --
-------------- ------------- --------------- -------------- -------------- -------------
Balance, December 31, 2001 162,000 243,788 23,365,349 (36,103,315 ) 28,517,492 (2,689,822 )
Distributions to limited
partners ($62.50 per
limited partner unit) -- -- (733,876 ) (2,391,033 ) -- --
Net income -- -- -- -- 678,046 --
-------------- ------------- --------------- -------------- -------------- -------------
Balance, December 31, 2002 $ 162,000 $ 243,788 $ 22,631,473 $ (38,494,348 ) $ 29,195,538 $ (2,689,822 )
============== ============= =============== ============== ============== =============
Total
------------
$17,277,743
(4,397,916 )
2,275,569
--------------
15,155,396
(2,913,650 )
1,253,746
--------------
13,495,492
(3,124,909 )
678,046
--------------
$11,048,629
==============
See accompanying note to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002 2001 2000
---------------- ---------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Net Income $ 678,046 $ 1,253,746 $ 2,275,569
---------------- ---------------- ---------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 207,815 263,950 298,325
Amortization 516 516 516
Provision for doubtful accounts -- 52,295 --
Provision for write-down of assets 498,312 223,550 --
Gain of sale of assets (197,873 ) (204,179 ) (766,913 )
Equity in earnings of joint ventures, net of
distributions 153,871 29,154 65,429
Decrease (increase) in receivables (30,372 ) 28,626 (61,959 )
Decrease (increase) in due from related parties 1,575 6,935 (5,433 )
Decrease (increase) in accrued rental income (3,896 ) 4,283 (11,353 )
Decrease (increase) in other assets (3,968 ) 526 5,592
Increase (decrease) in accounts payable and
real estate taxes payable (12,369 ) (12,938 ) 11,417
Increase (decrease) in due to related parties 8,569 361 (57,053 )
Increase (decrease) in rents paid in advance
and deposits 33,801 24,941 (12,996 )
---------------- ---------------- ---------------
Total adjustments 655,981 418,020 (534,428 )
---------------- ---------------- ---------------
Net Cash Provided by Operating Activities 1,334,027 1,671,766 1,741,141
---------------- ---------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of real estate properties 1,786,443 548,874 2,361,028
Additions to real estate properties with operating
leases -- -- (34,165 )
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 2,014,022 1,319,099 2,326,863
---------------- ---------------- ---------------
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 (2,714,025 ) (2,923,482 ) (4,480,216 )
---------------- ---------------- ---------------
Net cash used in financing activities (2,714,025 ) (2,923,482 ) (4,480,216 )
---------------- ---------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents 634,024 67,383 (412,212 )
Cash and Cash Equivalents at Beginning of Year 559,886 492,503 904,715
---------------- ---------------- ---------------
Cash and Cash Equivalents at End of Year $ 1,193,910 $ 559,886 $ 492,503
================ ================ ===============
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
2002 2001 2000
--------------- --------------- --------------
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred
and unpaid at end of period $ 55,329 $ 16,620 $ 71,056
=============== =============== ==============
Distributions declared and unpaid at
December 31 $ 834,380 $ 423,496 $ 433,329
=============== =============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
1. Significant Accounting Policies:
-------------------------------
Organization and Nature of Business - CNL Income Fund II, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for
the purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A.
Bourne. Mr. Seneff and Mr. Bourne are also 50% shareholders of the
Corporate General Partner. The general partners have responsibility for
managing the day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the real
estate property acquisitions at cost. The properties are leased to
third parties generally on a triple-net basis, whereby the tenant is
generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs.
During the years ended December 31, 2002, 2001 and 2000, tenants paid
directly to real estate taxing authorities $167,500 $177,800, and
$173,000, respectively, in real estate taxes in accordance with the
terms of their triple net leases with the Partnership.
The leases of the Partnership provide for base minimum annual rental
payments payable in monthly installments. In addition, certain leases
provide for contingent rental revenues based on the tenants' gross
sales in excess of a specified threshold. The partnership defers
recognition of the contingent rental revenues until the defined
thresholds are met.
The leases are accounted for using the operating method. Under the
operating method, real estate property leases are recorded at cost,
revenue is recognized as rentals are earned and depreciation is charged
to operations as incurred. Buildings are depreciated on the
straight-line method over their estimated useful lives of 30 years.
When scheduled rental revenues vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant
periodic rent over the lease term commencing on the date the property
is placed in service. Accrued rental income represents the aggregate
amount of income recognized on a straight-line basis in excess of
scheduled rental payments to date.
Substantially all leases are for 15 to 20 years and provide for minimum
and contingent rentals. The lease options generally allow tenants to
renew the leases for two to four successive five-year periods subject
to the same terms and conditions of the initial lease. Most leases also
allow the tenant to purchase the property at fair market value after a
specified portion of the lease has elapsed.
When the properties are sold, the related cost and accumulated
depreciation plus any accrued rental income, are removed from the
accounts and gains or losses from sales are reflected in income. The
general partners of the Partnership review the properties for
impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in
value has occurred by comparing the estimated future undiscounted cash
flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, a loss
is recorded for the amount by which the carrying value of the asset
exceeds its fair market value.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
1. Significant Accounting Policies - Continued:
-------------------------------------------
When the collection of amounts recorded as rental or other income is
considered to be doubtful, a provision is recorded to increase the
allowance for doubtful accounts. If amounts are subsequently determined
to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership invested in Kirkman Road
Joint Venture with unaffiliated entities. The Partnership's investments
in Holland Joint Venture and Show Low Joint Venture, and the properties
in Arvada, Colorado; Mesa, Arizona; Smithfield, North Carolina;
Vancouver, Washington; Overland Park, Kansas; and Memphis, Tennessee,
each of which is held as tenants-in-common with affiliates of the
general partners. These entities are accounted for using the equity
method since each joint venture agreement requires the consent of all
partners on all key decisions affecting the operations of the
underlying Property.
Cash and Cash Equivalents - The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds (some of which are
backed by government securities). Cash equivalents are stated at cost
plus accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand
deposits at commercial banks and money market funds may exceed
federally insured levels; however, the Partnership has not experienced
any losses in such accounts.
Lease Costs - Other assets included lease incentive costs and brokerage
and legal fees associated with negotiating leases and are amortized
over the terms of the new leases using the straight-line method. When a
property is sold or a lease is terminated, the related lease cost, if
any, net of accumulated amortization is removed from the accounts and
charged against income.
Income Taxes - Under Section 701 of the Internal Revenue Code, all
income, expenses and tax credit items flow through to the partners for
tax purposes. Therefore, no provision for federal income taxes is
provided in the accompanying financial statements. The Partnership is
subject to certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs represent a reduction
of Partnership equity and a reduction in the basis of each partner's
investment.
Use of Estimates - The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with generally
accepted accounting principles. The more significant areas requiring
the use of management estimates relate to the allowance for doubtful
accounts and future cash flows associated with long-lived assets.
Actual results could differ from those estimates.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
1. Significant Accounting Policies - Continued:
-------------------------------------------
Reclassification - Certain items in the prior year's financial
statements have been reclassified to conform to 2002 presentation,
including a change in presentation of the statement of cash flows from
the direct to the indirect method. These reclassifications had no
effect on partner's capital, net income or cash flows.
Statement of Financial Accounting Standards No. 144 ("FAS 144") -
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 estimated 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.
FASB Interpretation No. 46 ("FIN 46") - In January 2003, FASB issued
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities" to expand upon and strengthen existing accounting
guidance that addresses when a company should include the assets,
liabilities and activities of another entity in its financial
statements. To improve financial reporting by companies involved with
variable interest entities (more commonly referred to as
special-purpose entities or off-balance sheet structures), FIN 46
requires that a variable interest entity be considered 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. Consolidation of
variable interests entities will provide more complete information
about the resources, obligations, risks and opportunities of the
consolidated company. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31,
2003, and to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Management believes adoption of this
standard may result in either consolidation or additional disclosure
requirements with respect to the Partnership's unconsolidated joint
ventures or properties held with affiliates of the general partners as
tenants-in-common, which are currently accounted for under the equity
method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
2. Real Estate Properties with Operating Leases:
--------------------------------------------
Real estate properties with operating leases consisted of the following
at December 31:
2002 2001
-------------------- -------------------
Land $ 3,989,212 $ 4,362,307
Buildings 5,435,719 5,820,177
-------------------- -------------------
9,424,931 10,182,484
Less accumulated depreciation (2,672,245 ) (2,682,065 )
-------------------- -------------------
$ 6,752,686 $ 7,500,419
==================== ===================
In September 2001, the Partnership sold its property in Bay City, Texas
to the tenant and received net sales proceeds of approximately $548,900
resulting in a gain of $204,179. In connection with the sale, the
Partnership incurred a deferred, subordinated, real estate disposition
fee of $16,620. 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.
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. 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.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 2002:
2003 $ 825,937
2004 797,322
2005 727,682
2006 722,628
2007 498,529
Thereafter 1,261,958
----------------
$ 4,834,056
================
3. Investment in Joint Ventures:
----------------------------
The Partnership has a 50%, 49%, and 64% interest in the profits and
losses of Kirkman Road Joint Venture, Holland Joint Venture and Show
Low Joint Venture, respectively. The remaining interests in Holland
Joint Venture and Show Low Joint Venture are held by affiliates of the
general partners. The Partnership also has a 33.87%, a 57.91%, a 47%, a
37.01%, a 39.39%, and a 13.38% interest in properties in Arvada,
Colorado; Mesa, Arizona; Smithfield, North Carolina; Vancouver,
Washington, Overland, Kansas, and
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
3. Investment in Joint Ventures - Continued:
----------------------------------------
Memphis, Tennessee, respectively, with affiliates of the general
partners, as tenants-in-common. Amounts relating to these investments
are included in investment in joint ventures.
In August 2001, Peoria Joint Venture, in which the Partnership owned a
48% interest, sold its property to a third party for approximately
$1,786,900 resulting in a gain of approximately $136,700. The
Partnership dissolved the joint venture in accordance with the joint
venture agreement and did not incur a gain or loss on the dissolution.
The Partnership received approximately $830,300 representing its
pro-rata share of the liquidation proceeds from the joint venture.
Kirkman Road Joint Venture, Holland Joint Venture, Show Low Joint
Venture, and the Partnership and affiliates, as tenants-in-common in
six separate tenancy-in-common arrangements, each own and lease one
property to an operator of national fast-food or family-style
restaurant.
The following presents the combined, condensed financial information
for the joint ventures and the properties held as tenants-in-common
with affiliates at:
December 31,
2002 2001
---------------- ---------------
Real estate properties with operating leases, net $ 7,432,325 $ 7,774,746
Net investment in direct financing leases 2,172,748 2,177,989
Cash 28,744 29,589
Receivables -- 1,971
Accrued rental income 453,259 373,454
Other assets 194 2,180
Liabilities 20,985 20,843
Partners' capital 10,066,285 10,339,086
Year Ended December 31,
2002 2001 2000
--------------- --------------- --------------
Rental revenues $1,155,532 $ 1,101,784 $ 1,344,694
Expenses (206,369 ) (218,145 ) (210,937 )
Provision for write-down of assets (172,165 ) -- (31,543 )
--------------- --------------- --------------
Net Income $ 776,998 $ 883,639 $ 1,102,214
--------------- --------------- --------------
The Partnership recognized income totaling $253,111, $441,969, and
$443,567, for the years ended December 31, 2002, 2001 and 2000,
respectively, from these joint ventures and the properties held as
tenants-in-common with affiliates of the general partners.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
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 the loss on disposal of the
property. At June 2002, in connection with the anticipated sale of the
land, the Partnership recorded a provision for write-down of assets of
$63,714. The provision represented the difference between the carrying
value of the land and its estimated fair value. In August 2002, the
Partnership sold the land to a third party and received net sales
proceeds of approximately $113,700, resulting in a 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 because in October 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 provision for write-down of assets of $113,615.
The provision represented the difference between the carrying value of
the property and its estimated fair value. In August 2002, the
Partnership sold the property to a third party and received net sales
proceeds of approximately $204,700, resulting in a loss on disposal of
assets of $15,341.
In June 2002, the Partnership recorded a provision for write-down of
assets of $181,231 relating to the property in Pineville, Louisiana
since 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. In December 2002, the Partnership sold this property and
received net sales proceeds of approximately $262,400. Since the
Partnership had recorded a provision for write-down for this Property,
no additional gain or loss was recognized on the sale.
In September 2002, the Partnership recorded a provision for write-down
of assets of $139,752 relating to the property in Tomball, Texas in
anticipation of the sale of this Property. The provision represented
the difference between the carrying value of the property and its
estimated fair value. This property was vacant since the tenant opted
to not renew its lease, which expired in May 2002. In October 2002, the
Partnership sold to an unrelated third party the property and received
net sales proceeds of approximately $458,200. Since the Partnership had
recorded a provision for write-down for this property, no additional
gain or loss was recognized on the sale.
In connection with the sales of these four 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.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
4. Discontinued Operations - Continued:
-----------------------------------
The Partnership was negotiating a contract with an unrelated party to
sell the property in Nederland, Texas at September 2002. The
negotiations were terminated during the fourth quarter of 2002, and as
a result, the Partnership reclassified the assets from real estate held
for sale to real estate properties with operating leases.
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:
Year Ended December 31,
2002 2001 2000
--------------- --------------- -------------
Rental revenues $ 79,103 $ 177,623 $ 268,444
Other income 4,031 -- --
Expenses (65,128 ) (142,901 ) (92,488 )
Provision for write-down of assets (409,535 ) (223,550 ) --
Loss on disposal of assets (25,967 ) -- --
--------------- --------------- -------------
Income (loss) from discontinued operations $ (417,496 ) $ (188,828 ) $ 175,956
=============== =============== =============
5. Allocations and Distributions:
-----------------------------
From inception through December 31, 1999, generally all net income and
net losses of the Partnership, excluding gains and losses from the sale
of properties, were allocated 99 percent to the limited partners and
one percent to the general partners. From inception through December
31, 1999, distributions of net cash flow were made 99 percent to the
limited partners and one percent to the general partners. However, the
one percent of net cash flow to be distributed to the general partners
was subordinated to receipt by the limited partners of an aggregate,
ten percent, noncumulative, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return").
From inception through December 31, 1999, generally net sales proceeds
from the sale of properties not in liquidation of the Partnership, to
the extent distributed, were distributed first to the limited partners
in an amount sufficient to provide them with their cumulative 10%
Preferred Return, plus the return of their adjusted capital
contributions. The general partners then received, to the extent
previously subordinated and unpaid, a one percent interest in all prior
distributions of net cash flow and a return of their capital
contributions. Any remaining sales proceeds were distributed 95 percent
to the limited partners and five percent to the general partners. Any
gain from the sale of a property not in liquidation of the Partnership
was, in general, allocated in the same manner as net sales proceeds are
distributable. Any loss from the sale of a property was, in general,
allocated first on a pro rata basis to partners with positive balances
in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties,
will be used in the following order: (i) first to pay and discharge all
of the Partnership's liabilities to creditors, (ii) second, to
establish reserves that may be deemed necessary for any anticipated or
unforeseen liabilities or obligations of the Partnership, (iii) third,
to pay all of the Partnership's liabilities, if any, to the general and
limited partners, (iv) fourth, after
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
5. Allocations and Distributions - Continued:
-----------------------------------------
allocations of net income, gains and/or losses, to distribute to the
partners with positive capital accounts balances, in proportion to such
balances, up to amounts sufficient to reduce such positive balances to
zero, and (v) thereafter, any funds remaining shall then be distributed
95 percent to the limited partners and five percent to the general
partners.
Effective January 1, 2000, the general partners waived their right to
receive future distributions from the Partnership, including both
distributions of operating cash flow and distributions of liquidation
proceeds, to the extent that the cumulative amount of such
distributions would exceed the balance in the general partners' capital
account as of December 31, 1999. Accordingly, for years commencing
January 1, 2000 and after, the Partnership's net income will be
allocated entirely among the limited partners. However, if losses are
allocated to the general partners in a year, an amount of income equal
to the sum of such losses may be allocated to the general partners in
succeeding years. Accordingly, the general partners were not allocated
any net income and did not receive any distributions during the years
ended December 31, 2002, 2001 and 2000.
During the years ended December 31, 2002, 2001 and 2000, the
Partnership declared distributions to the limited partners of
$3,124,909, $2,913,650, and $4,397,916, respectively. Distributions for
the year ended December 31, 2002, 2001 and 2000, included $1,600,000,
$1,200,000 and $2,500,000 in special distributions, as a result of the
distributions of the majority of net sales proceeds from the sales of
several properties and distribution of insurance proceeds received in
2002. These special distributions were effectively a return of a
portion of the limited partners' investment, although, in accordance
with the Partnership agreement, $866,124, $657,471 and $1,407,878 were
applied toward the limited partners' 10% Preferred Return and the
balances of $733,876, $542,529 and $1,092,122 were 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 accordingly. As a result of the sales of the properties in
2002, 2001 and 2000, the Partnership's total revenue has decreased,
while the majority of the Partnership's operating expenses remained
fixed. Therefore, distributions of net cash flow have been adjusted in
the quarter ended September 30, 2000, with subsequent adjustments in
the quarters ended September 30, 2001 and 2002, and the quarter ended
December 31, 2002. No distributions have been made to the General
Partners to date.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
6. Income Taxes:
------------
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years
ended December 31:
2002 2001 2000
-------------- -------------- ---------------
Net income for financial reporting purposes $ 678,046 $ 1,253,746 $ 2,275,569
Effect of timing differences relating to
depreciation (8,035 ) 11,312 15,756
Effect of timing differences relating to
gains/losses on real estate property sales (738,824 ) (6,653 ) (27,863 )
Effect of timing differences relating to equity
in earnings of joint ventures 79,851 32,953 (20,354 )
Deduction of transaction costs for tax reporting
purposes -- -- (144,538 )
Effect of timing differences relating to
allowance for doubtful accounts (23,640 ) (122,653 ) 67,603
Accrued rental income (3,896 ) 4,283 (11,353 )
Rents paid in advance 19,203 (9,950 ) (11,996 )
Provision for write-down of assets 498,312 223,550 --
Provision for (deduction of) contamination
expenses (7,329 ) -- 75,000
-------------- -------------- ---------------
Net income for federal income tax purposes $ 493,688 $ 1,386,588 $ 2,217,824
============== ============== ===============
7. Related Party Transactions:
--------------------------
One of the individual general partners, James M. Seneff, Jr., is one of
the principal shareholders of CNL Holdings, Inc. The other individual
general partner, Robert A. Bourne, serves as President and Treasurer of
CNL Financial Group, Inc., a wholly owned subsidiary of CNL Holdings,
Inc. CNL APF Partners, LP, a wholly owned subsidiary of CNL American
Properties Fund, Inc. ("APF") served as the Partnership's advisor until
January 1, 2002, when it assigned its rights and obligations under a
management agreement to RAI Restaurants, Inc. (formerly known as CNL
Restaurants XVIII, Inc.). RAI Restaurants, Inc. ("the Advisor") is a
wholly owned subsidiary of APF. The individual general partners are
stockholders and directors of APF.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
7. Related Party Transactions- Continued:
-------------------------------------
The Advisor provides services pursuant to a management agreement with
the partnership. In connection therewith, the Partnership agreed to pay
the Advisor an annual, noncumulative, subordinated property management
fee of one-half of one percent of the Partnership assets under
management (valued at cost) annually. The property management fee is
limited to one percent of the sum of gross operating revenues from
properties wholly owned by the Partnership and the Partnership's
allocable share of gross operating revenues from joint ventures and the
properties held as tenants-in-common with affiliates or competitive
fees for comparable services. In addition, these fees will be incurred
and will be payable only after the limited partners receive their
aggregate, noncumulative 10% Preferred Return. Due to the fact that
these fees are noncumulative, if the limited partners do not receive
their 10% Preferred Return in any particular year, no property
management fees will be due or payable for such year. As a result of
such threshold no property management fees were incurred during the
years ended December 31, 2002, 2001 and 2000.
The Advisor is also 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 Advisor provides a
substantial amount of services in connection with the sale. Payment of
the real estate disposition fee is subordinated to the receipt by the
limited partners of their aggregate, cumulative 10% Preferred Return,
plus their adjusted capital contributions. During the years ended
December 31, 2002, 2001 and 2000, the Partnership incurred $55,329,
$16,620 and $71,056 in deferred, subordinated, real estate disposition
fees as a result of the 2002, 2001 and 2000 sales of properties.
During the years ended December 31, 2002, 2001, and 2000, the
Partnership's advisor and its affiliates provided accounting and
administrative services. The Partnership incurred $152,193, $140,936,
and $82,134, for the years ended December 31, 2002, 2001, and 2000,
respectively, for such services.
The due to related parties consisted of the following at December 31:
2002 2001
--------------- ---------------
Due to Advisor and its affiliates:
Expenditures incurred on behalf
of the Partnership, including
accounting and administrative
services $ 12,381 $ 3,812
Deferred, subordinated real
estate disposition fee 188,155 132,826
---------------
---------------
$ 200,536 $ 136,638
=============== ===============
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
8. Concentration of Credit Risk:
----------------------------
For the years ended December 31, 2002, 2001 and 2000, rental revenues
from Golden Corral Corporation were $209,247, $397,632 and $413,941,
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 rental revenues (including the Partnership's share of rental
revenues from the joint ventures and the properties held as
tenants-in-common with affiliates of the General Partners), for each of
the years ended December 31:
2002 2001 2000
-------------- -------------- ----------------
Golden Corral Family
Steakhouse Restaurants $ 238,441 $ 397,632 $ 413,941
Wendy's Old Fashioned
Hamburger Restaurants 227,046 219,778 N/A
The information denoted by N/A indicates that for each period
presented, 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 the
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.
9. Commitments and Contingencies:
-----------------------------
Underground petroleum contamination was discovered in 2000 relating to
a Property in Ocala, Florida. The Partnership applied to and qualified
for assistance from a state funded clean-up program. Under this
program, the Partnership is responsible for 25% of the actual clean-up
costs and is receiving assistance for the remaining 75% of the costs.
The Partnership anticipated that future clean-up costs would be
approximately $300,000 and accrued in 2000, as a liability, the $75,000
of the estimated clean-up costs. The project is expected to be
completed in five phases. During the year ended December 31, 2002,
phase one of the clean-up work commenced at the site and payment of the
first installment was made. The work for this phase was finalized, and
the Department of Environmental Protection approved the conclusions.
During the first quarter of 2003, phase two of the clean-up work
commenced.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
10. Selected Quarterly Financial Data:
---------------------------------
The following table presents selected unaudited quarterly financial
data for each full quarter during the years ended December 31, 2002 and
2001.
2002 Quarter First Second Third Fourth Year
------------------------------- ------------ ----------- ----------- ----------- -----------
Continuing Operations (1):
Revenues $ 282,088 $ 271,143 $ 277,347 $ 311,225 $ 1,141,803
Equity in earnings of
joint ventures (2) 94,335 83,130 85,247 (9,601 ) 253,111
Income from continuing
operations 244,093 374,550 269,158 207,741 1,095,542
Discontinued Operations (1):
Revenues 43,634 35,514 -- 3,986 83,134
Income (loss) from 27,447 (252,832 ) (182,716 ) (9,395 ) (417,496)
discontinued operations
Net Income 271,540 121,718 86,442 198,346 678,046
Net income (loss) per limited partner Unit:
Continuing operations $ 4.88 $ 7.49 $ 5.38 $ 4.16 $ 21.91
Discontinued operations 0.55 (5.06 ) (3.65 ) (0.19 ) (8.35)
------------ ----------- ----------- ----------- -----------
Total $ 5.43 $ 2.43 $ 1.73 $ 3.97 $ 13.56
============ =========== =========== =========== ===========
2001 Quarter First Second Third Fourth Year
------------------------------- ------------ ----------- ----------- ----------- -----------
Continuing Operations (1):
Revenues $ 293,315 $ 304,169 $ 316,221 $ 331,436 $ 1,245,141
Equity in earnings of
joint ventures 106,967 104,781 166,977 63,244 441,969
Income from continuing
operations 236,429 296,675 601,694 307,776 1,442,574
Discontinued Operations (1):
Revenues 61,761 25,417 46,854 43,591 177,623
Income (loss) from
discontinued operations (130,024 ) (24,077 ) 20,847 (55,574 ) (188,828)
Net income 106,405 272,598 622,541 252,202 1,253,746
Net income (loss) per limited partner Unit:
Continuing operations $ 4.73 $ 5.93 $ 12.03 $ 6.16 $ 28.85
Discontinued operations (2.60 ) (0.48 ) 0.42 (1.12 ) (3.78)
------------ ----------- ----------- ----------- -----------
Total $ 2.13 $ 5.45 $ 12.45 $ 5.04 $ 25.07
============ =========== =========== =========== ===========
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
10. Selected Quarterly Financial Data - Continued:
---------------------------------------------
(1) Certain items in the quarterly financial data have been
reclassified to conform to the 2002 presentation. These
reclassifications had no effect on total net income. The results
of operations relating to properties that were either disposed
of or were classified as held for sale as of December 31, 2002
are reported as discontinued operations for all periods
presented. The results of operations relating to properties that
were identified for sale as of December 31, 2001 but sold
subsequently are reported as continuing operations.
(2) In October 2002, Show Low Joint Venture, in which the
Partnership owns an approximate 64% interest, recorded a
provision for write-down of assets of approximately $172,200
relating to the property in Greensboro, North Carolina. The
provision represented the difference between the carrying value
of the property and its estimated fair value.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partners of the Registrant are James M. Seneff, Jr., Robert
A. Bourne and CNL Realty Corporation, a Florida corporation. The General
Partners manage and control the Partnership's affairs and have general
responsibility and the ultimate authority in all matters affecting the
Partnership's business. The Partnership has available to it the services,
personnel and experience of CNL American Properties Fund, Inc. ("APF"), CNL Fund
Advisors, Inc., CNL Financial Group, Inc. and their affiliates, all of which are
affiliates of the General Partners.
James M. Seneff, Jr., age 56. Since 1971, Mr. Seneff has been active in
the acquisition, development, and management of real estate projects and,
directly or through an affiliated entity, has served as a general partner or
co-venturer in over 100 real estate ventures. These ventures have involved the
financing, acquisition, construction, and leasing of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Mr. Seneff has
served as Director and Chairman of the Board of APF, a public, unlisted real
estate investment trust, since 1994. Mr. Seneff served as Chief Executive
Officer of APF from 1994 through August 1999, and has served as co-Chief
Executive Officer of APF since December 2000. Mr. Seneff served as Chairman of
the Board and Chief Executive Officer of CNL Fund Advisors, Inc., formerly the
Partnership's advisor, until it merged with a wholly-owned subsidiary of APF in
September 1999, and in June 2000, was re-elected to those positions of CNL Fund
Advisors, Inc. Mr. Seneff is a principal stockholder of CNL Holdings, Inc., the
parent company of CNL Financial Group, Inc. (formerly CNL Group, Inc.), a
diversified real estate company, and has served as a Director, Chairman of the
Board and Chief Executive Officer of CNL Financial Group, Inc. since its
formation in 1980. CNL Financial Group, Inc. is the parent company, either
directly or indirectly through subsidiaries, of CNL Real Estate Services, Inc.,
CNL Capital Markets, Inc., CNL Investment Company and CNL Securities Corp., all
of which are engaged in the business of real estate finance. Mr. Seneff also
serves as a Director, Chairman of the Board and Chief Executive Officer of CNL
Hospitality Properties, Inc., a public, unlisted real estate investment trust,
as well as, CNL Hospitality Corp., its advisor. In addition, he serves as a
Director, Chairman of the Board and Chief Executive Officer of CNL Retirement
Properties, Inc., a public, unlisted real estate investment trust and its
advisor, CNL Retirement Corp. Since 1992, Mr. Seneff has also served as a
Director, Chairman of the Board and Chief Executive Officer of Commercial Net
Lease Realty, Inc., a public real estate investment trust that is listed on the
New York Stock Exchange. Mr. Seneff has also served as a Director, Chairman of
the Board and Chief Executive Officer of CNL Securities Corp. since 1979; CNL
Investment Company since 1990; and CNL Institutional Advisors, Inc., a
registered investment advisor for pension plans, since 1990. Mr. Seneff formerly
served as a Director of First Union National Bank of Florida, N.A., and
currently serves as the Chairman of the Board of CNL Bank, an independent,
state-chartered commercial bank. Mr. Seneff previously served on the Florida
State Commission on Ethics and is a former member and past Chairman of the State
of Florida Investment Advisory Council, which recommends to the Florida Board of
Administration investments for various Florida employee retirement funds. The
Florida Board of Administration, Florida's principal investment advisory and
money management agency, oversees the investment of more than $60 billion of
retirement funds. Mr. Seneff received his degree in Business Administration from
Florida State University in 1968.
Robert A. Bourne, age 55. Mr. Bourne has participated as a general
partner or co-venturer in over 100 real estate ventures involved in the
financing, acquisition, construction, and leasing of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Mr. Bourne is a
Director of APF. Mr. Bourne served as President of APF from 1994 through
February 1999. He also served as Treasurer from February 1999 through August
1999 and from May 1994 through December 1994. He also served in various
executive positions with CNL Fund Advisors, Inc. prior to its merger with a
wholly-owned subsidiary of APF including, President from 1994 through September
1997, and Director from 1994 through August 1999. Mr. Bourne serves as President
and Treasurer of CNL Financial Group, Inc.; Director, Vice Chairman of the
Board, and Treasurer , and from 1997 until June 2002 served as President, of CNL
Hospitality Properties, Inc., a public, unlisted real estate investment trust;
as well as, Director, Vice Chairman of the Board, and Treasurer, and from 1997
until June 2002 served as President, of CNL Hospitality Corp., its advisor. In
addition, Mr. Bourne serves as Director, Vice Chairman of the Board, and
Treasurer, and from 1997 until June 2002 served as President, of CNL Retirement
Properties, Inc., a public, unlisted real estate investment trust; as well as, a
Director, Vice Chairman of the Board, and Treasurer, and from 1997 until June
2002 served as President, of its advisor, CNL Retirement Corp. Mr. Bourne also
serves as a Director of CNL Bank. He has served as a Director since 1992, Vice
Chairman of the Board since February 1996, Secretary and Treasurer from February
1996 through 1997, and President from July 1992 through February 1996, of
Commercial Net Lease Realty, Inc., a public real estate investment trust listed
on the New York Stock Exchange. Mr. Bourne also serves as Director, President
and Treasurer for various affiliates of CNL Financial Group, Inc. including, CNL
Investment Company, CNL Securities Corp. and CNL Institutional Advisors, Inc., a
registered investment advisor for pension plans. Mr. Bourne began his career as
a certified public accountant employed by Coopers & Lybrand, Certified Public
Accountants, from 1971 through 1978, where he attained the position of Tax
Manager in 1975. Mr. Bourne graduated from Florida State University in 1970
where he received a B.A. in Accounting, with honors.
Curtis B. McWilliams, age 47. Mr. McWilliams has served as Co-Chief
Executive Officer of APF since December 2000 and previously served as Chief
Executive Officer from September 1999 through December 2000. Prior to the
acquisition of CNL Fund Advisors, Inc., Mr. McWilliams served as President of
APF from February 1999 until September 1999. From February 1998 to February
1999, he served as Executive Vice President of APF. Mr. McWilliams joined CNL
Financial Group, Inc. in April 1997 and served as an Executive Vice President
from October 1997 until September 1999. In addition, Mr. McWilliams served as
President of CNL Fund Advisors, Inc. and CNL Financial Services, Inc., a
corporation engaged in the business of real estate financing, from April 1997
until the acquisition of such entities by wholly-owned subsidiaries of APF in
September 1999. From September 1983 through March 1997, Mr. McWilliams was
employed by Merrill Lynch & Co. The majority of his career at Merrill Lynch &
Co. was in the Investment Banking division where he served as a Managing
Director. Mr. McWilliams received a B.S.E. in Chemical Engineering from
Princeton University in 1977 and a Master of Business Administration degree with
a concentration in finance from the University of Chicago in 1983.
Steven D. Shackelford, age 39. Mr. Shackelford was promoted to
Executive Vice President of APF in June 2000. He served as Senior Vice President
from September 1999 until his promotion in June 2000. Mr. Shackelford has served
as Chief Financial Officer since January 1997 and has served as Secretary and
Treasurer of APF since September 1999. He also served as Chief Financial Officer
of CNL Fund Advisors, Inc. from September 1996 to September 1999. From March
1995 to July 1996, Mr. Shackelford was a senior manager in the national office
of Price Waterhouse LLP where he was responsible for advising foreign clients
seeking to raise capital and a public listing in the United States. From August
1992 to March 1995, he was a manager in the Paris, France office of Price
Waterhouse, serving several multi-national clients. Mr. Shackelford was an audit
staff and senior from 1986 to 1992 in the Orlando, Florida office of Price
Waterhouse. Mr. Shackelford received a Bachelor of Arts degree in Accounting,
with honors, and a Master of Business Administration degree from Florida State
University and is a certified public accountant.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the General Partners, the
officers of the corporate General Partner, and persons who own more than ten
percent of a registered class of the Partnership's equity securities
(collectively, the "Reporting Persons"), to file reports of ownership and
changes in ownership on Forms 3, 4 and 5 with the SEC. Reporting Persons are
required by SEC regulation to furnish the Partnership with copies of all Forms
3, 4 and 5 that they file.
Based solely on the General Partners' review of the copies of such
forms the Partnership has received and written representations from certain
Reporting Persons that they were not required to file Forms 5 for the last
fiscal year, the General Partners believe that all Reporting Persons complied
with all filing requirements applicable to them with respect to transactions
during fiscal 2002.
Item 11. Executive Compensation
Other than as described in Item 13, the Partnership has not paid and
does not intend to pay any executive compensation to the General Partners or any
of their affiliates. There are no compensatory plans or arrangements regarding
termination of employment or change of control.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 10, 2003, no person was known to the Registrant to be a
beneficial owner of more than five percent of the Units.
The following table sets forth, as of March 10, 2003, the beneficial
ownership interests of the General Partners in the Registrant.
Title of Class Name of Partner Percent of Class
General Partnership Interests James M. Seneff, Jr. 45%
Robert A. Bourne 45%
CNL Realty Corporation 10%
--------
100%
========
Neither the General Partners, nor any of their affiliates, owns any
interest in the Registrant, except as noted above.
The Partnership does not have any equity compensation plans.
Item 13. Certain Relationships and Related Transactions
The table below summarizes the types, recipients, methods of
computation and amounts of compensation, fees and distributions paid or payable
by the Partnership to the General Partners and their affiliates for the year
ended December 31, 2002, exclusive of any distributions to which the General
Partners or their affiliates may be entitled by reason of their purchase and
ownership of Units.
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2002
- ---------------------------------- -------------------------------------- ------------------------------
Reimbursement to affiliates for Operating expenses are reimbursed at Accounting and
operating expenses the lower of cost or 90% of the administra-tive services:
prevailing rate at which comparable $152,193
services could have been obtained in
the same geographic area. If the
General Partners or their affiliates
loan funds to the Partnership, the
General Partners or their affiliates
will be reimbursed for the interest
and fees charged to them by the
unaffiliated lenders for such
loans. Affiliates of the General
Partners from time to time incur
certain operating expenses on behalf
of the Partnership for which the
Partnership reimburses the
affiliates without interest.
Annual, subordinated property One-half of one percent per year of $-0-
management fee to affiliates Partnership assets under management
(valued at cost), subordinated to certain
minimum returns to the Limited Partners.
The property management fee will not
exceed the lesser of one percent of gross
operating revenues or competitive fees
for comparable services. Due to the fact
that these fees are noncumulative if the
Limited Partners do not receive their 10%
Preferred Return in any particular year
no property management fees will be due
or payable for such year.
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2002
- --------------------------------- -------------------------------------- ------------------------------
Deferred, subordinated real A deferred, subordinated real estate $55,329
estate disposition fee payable disposition fee, payable upon sale
to affiliates of one or more Properties, in an
amount equal to the lesser of (i)
one-half of a competitive real estate
commission, or (ii) three percent of the
sales price of such Property or
Properties. Payment of such fee shall be
made only if affiliates of the General
Partners provide a substantial amount of
services in connection with the sale of a
Property or Properties and shall be
subordinated to certain minimum returns
to the Limited Partners. However, if the
net sales are reinvested in a replacement
Property, no such real estate disposition
fee will be incurred until such
replacement Property is sold and the net
sales proceeds are distributed.
General Partners' deferred, A deferred, subordinated share equal $-0-
subordinated share of to one percent of Partnership
Partnership net cash flow distributions of net cash flow,
subordinated to certain minimum
returns to the Limited Partners.
General Partners' deferred, A deferred, subordinated share equal $-0-
subordinated share of to five percent of Partnership
Partnership net sales proceeds distributions of such net sales
from a sale or sales not in proceeds, subordinated to certain
liquidation of the Partnership minimum returns to the Limited
Partners.
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2002
- --------------------------------- -------------------------------------- ------------------------------
General Partners' share of Distributions of net sales proceeds $-0-
Partnership net sales proceeds from a sale or sales of
from a sale or sales in substantially all of the
liquidation of the Partnership Partnership's assets will be
distributed in the following order or
priority: (i) first, to pay all debts and
liabilities of the Partnership and to
establish reserves; (ii) second, to
Partners with positive capital account
balances, determined after the allocation
of net income, net loss, gain and loss,
in proportion to such balances, up to
amounts sufficient to reduce such
balances to zero; and (iii) thereafter,
95% to the Limited Partners and 5% to the
General Partners.
Item 14. 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 Annual Report on Form 10-K 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 IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 2002 and 2001
Statements of Income for the years ended December 31, 2002, 2001, and 2000
Statements of Partners' Capital for the years ended December 31, 2002, 2001, and 2000
Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 2002, 2001, and 2000
Schedule III - Real Estate and Accumulated Depreciation at December 31, 2002
Notes to Schedule III - Real Estate and Accumulated Depreciation at December 31, 2002
All other Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or
notes thereto.
3. 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
For 10-Q filed with the Securities and Exchange Commission
on August 13, 2001, and incorporated herein by 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) The Registrant filed no reports on Form 8-K during the period from
October 1, 2002 through December 31, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 24th day of
March, 2003.
CNL INCOME FUND II, LTD.
By:CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
--------------------------------
ROBERT A. BOURNE, President
By:ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
--------------------------------
ROBERT A. BOURNE
By:JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
--------------------------------
JAMES M. SENEFF, JR.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Robert A. Bourne President, Treasurer and Director March 24, 2003
- ------------------------------------ (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director March 24, 2003
- ------------------------------------ (Principal Executive Officer)
James M. Seneff, Jr.
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 annual report on Form 10-K of the registrant;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation
Date"); and
c. presented in this annual 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 functions):
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 annual 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: March 24, 2003
/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 annual report on Form 10-K of the registrant;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation
Date"); and
c. presented in this annual 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 functions):
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 annual 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: March 24, 2003
/s/ Robert A. Bourne
- ----------------------
Robert A. Bourne
President and Treasurer
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2002, 2001, and 2000
Additions Deductions
--------------------------------- -------------------------------
Collected
or Deter-
Balance at Charged to Charged to Deemed mined to Balance
Beginning Costs and Other Uncollec- be Col- at End
Year Description of Year Expenses Accounts tible lectible of Year
- ---------- ----------------- -------------- --------------- ---------------- ------------- ------------ ------------
2000 Allowance for
doubtful
accounts (a) $ 78,690 $ 10,963 $ 69,815 (b) $ -- $ 13,175 $ 146,293
============== =============== ================ ============= ============ ============
2001 Allowance for
doubtful
accounts (a) $ 146,293 $ 62,770 $ 136,620 (b) $ 314,463 (c) $ 7,580 $ 23,640
============== =============== ================ ============= ============ ============
2002 Allowance for
doubtful
accounts (a) $ 23,640 $ -- $ -- $ 23,640 (c) $ -- $ --
============== =============== ================ ============= ============ ============
(a) Deducted from receivables on the balance sheet.
(b) Reduction of rental and other income.
(c) Amounts written off as uncollectible.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
Costs Capitalized
Subsequent to
Initial Cost Acquisition
------------------------- ----------------------
Encum- Buildings and Improve- Carrying
brances Land Improvements ments Costs
----------- ------------ ------------------------ --------
Properties the Partnership
has Invested in:
Checkers Drive-In Restaurants:
Fayetteville, Georgia - $ 338,735 - - -
Atlanta, Georgia - 317,128 - - -
Golden Corral Family
Steakhouse Restaurants:
Nederland, Texas - 327,473 520,701 - -
Hableanos Mexican Grill Restaurant:
Hueytown, Alabama - 258,084 513,853 - -
Jack in the Box Restaurant:
Lubbock, Texas - 229,198 408,702 - -
KFC Restaurant: -
Eagan, Minnesota - 202,084 370,247 31,976 -
Lonestar Steakhouse &
Saloon Restaurant:
Sterling Heights, Michigan (-) 430,281 - 648,736 -
Pizza Hut Restaurants:
Clayton, New Mexico - 54,093 200,141 - -
Santa Rosa, New Mexico - 75,963 168,204 - -
Childress, Texas - 71,512 145,191 - -
Coleman, Texas - 70,208 141,004 - -
Ponderosa Steakhouse Restaurant:
Scottsburg, Indiana - 208,781 - 518,884 -
Popeyes Famous Fried
Chicken Restaurants:
Ocala, Florida - 218,677 274,992 - -
Wendy's Old Fashioned
Hamburger Restaurants:
Gainesville, Texas - 166,302 449,914 - -
Vail, Colorado - 782,609 - 550,346 -
Other:
Oxford, Alabama (f) - 152,567 355,990 - -
Lombard, Illinois (g) - 85,517 96,205 40,633 -
------------ ----------- ----------- --------
$3,989,212 $3,645,144 $1,790,575 -
============ =========== =========== ========
Property of Joint Venture in
Which the Partnership has
a 50% Interest and has Invested
in Under an Operating Lease:
Pizza Hut Restaurant:
Orlando, Florida - $330,568 $220,588 - -
============ =========== =========== ========
Property of Joint Venture in
Which the Partnership has
a 49% Interest and has Invested
in Under an Operating Lease:
Denny's Restaurant:
Holland, Michigan - $295,987 - $780,451 -
============ =========== =========== ========
Property of Joint Venture in
Which the Partnership has
a 64% Interest and has Invested
in Under an Operating Lease:
Darryl's Restaurant:
Greensboro, North Carolina (m) - $261,013 $489,757 - -
============ =========== =========== ========
Property in Which the Partnership
has a 33.87% Interest as Tenants-
In-Common and has Invested
in Under an Operating Lease
Arby's Restaurant:
Arvada, Colorado - $260,439 $545,126 - -
============ =========== =========== ========
Property in Which the Partnership
has a 57.91% Interest as Tenants-
in-Common and has Invested
in Under an Operating Lease:
Del Taco Restaurant:
Mesa, Arizona (j) (k) - $440,843 - - -
============ =========== =========== ========
Property in Which the Partnership
has a 47% Interest as Tenants-
In Common and has Invested
in Under an Operating Lease:
Golden Corral Restaurant:
Smithfield, North Carolina - $264,272 $1,155,018 - -
============ =========== =========== ========
Property in Which the Partnership
has a 37.01% Interest as Tenants-
in Common and has Invested in
Under an Operating Lease:
Chevy's Fresh Mex Restaurant:
Vancouver, Washington - $875,659 $1,389,366 - -
============ =========== =========== ========
Property in Which the Partnership
has a 13.38% Interest as Tenants-
In-Common and has Invested
in Under an Operating Lease:
IHOP Restaurant
Memphis, Tennessee - $678,890 $825,076 - -
============ =========== =========== ========
Property of Joint Venture in
Which the Parnership has a
64% Interest has Invested in
Under a Direct Financing Lease:
Boston Market Restaurant:
Mesa, Arizona (k) - - $650,622 - -
============ =========== =========== ========
Property inWhich the Partnership has
a 39.39% Interest as Tenants-
In-Common and has Invested
in Under a Direct Financing Lease:
IHOP Restaurant
Overland Park, Kansas - $335,374 $1,273,134 - -
============ =========== =========== ========
Life on Which
Net Cost Basis at Which Depreciation in
Carried at Close of Period (c) Date Latest Income
- -----------------------------------------
Buildings and Accumulated of Con- Date Statement is
Land Improvements Total Depreciation structionAcquired Computed
- ------------- -------------------------- --------------------------------------------
$ 338,735 - $ 338,735 (d) - 12/94 (d)
317,128 - 317,128 (d) - 12/94 (d)
327,473 520,701 848,174 261,797 1987 08/87 (b)
258,084 513,853 771,937 266,918 1987 06/87 (b)
229,198 408,702 637,900 128,508 1993 07/93 (b)
202,084 402,223 604,307 204,464 1987 10/87 (b)
430,281 648,736 1,079,017 320,764 1988 08/87 (b)
54,093 200,141 254,234 102,850 1986 08/87 (b)
75,963 168,204 244,167 86,438 1986 08/87 (b)
71,512 145,191 216,703 74,612 1974 08/87 (b)
70,208 141,004 211,212 70,894 1977 12/87 (b)
208,781 518,884 727,665 256,560 1988 10/87 (b)
218,677 274,992 493,669 145,898 1987 02/87 (b)
166,302 449,914 616,216 232,455 1986 07/87 (b)
782,609 550,346 1,332,955 282,816 1987 08/87 (b)
152,567 355,990 508,557 176,505 1987 02/88 (b)
85,517 136,838 222,355 60,766 1973 10/87 (b)
- ------------- ------------ ------------ -----------
$3,989,212 $5,435,719 $9,424,931 $2,672,245
============= ============ ============ ===========
$330,568 $220,588 $551,156 $111,824 1987 10/87 (b)
============= ============ ============ ===========
$295,987 $780,451 $1,076,438 $368,546 1988 10/87 (b)
============= ============ ============ ===========
$199,034 $379,571 $578,605 $16,010 1987 07/87 (l)
============= ============ ============ ===========
$260,439 $545,126 $805,565 $150,393 1994 09/94 (b)
============= ============ ============ ===========
$440,843 (i) $440,843 (h) 1997 10/97 (h)
============= ============
$264,272 $1,155,018 $1,419,290 $193,451 1996 12/97 (b)
============= ============ ============ ===========
$875,659 $1,389,366 $2,265,025 $231,685 1994 12/97 (b)
============= ============ ============ ===========
$678,890 $825,076 $1,503,966 $136,654 1997 01/98 (b)
============= ============ ============ ===========
- (i) (i) (h) 1997 10/97 (h)
=============
- (j) (j) (i) 1997 01/98 (h)
=============
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(a) Transactions in real estate and accumulated depreciation are summarized
below. The balances in 2001, 2000, and 1999 have been adjusted to
reflect the reclassification of properties accounted for as
discontinued operations.
Accumulated
Cost Depreciation
---------------- -----------------
Properties the Partnership has Invested in Under
Operating Leases:
Balance, December 31, 1999 $ 12,704,471 $ 2,952,699
Additions 34,166 --
Dispositions (2,088,217 ) (565,157 )
Depreciation expense -- 233,002
---------------- -------------------
Balance, December 31, 2000 10,650,420 2,620,544
Dispositions (467,936 ) (139,862 )
Depreciation expense -- 201,383
---------------- -----------------
Balance, December 31, 2001 10,182,484 2,682,065
Dispositions (757,553 ) (191,159 )
Depreciation expense -- 181,339
---------------- -----------------
Balance, December 31, 2002 $ 9,424,931 $ 2,672,245
================ =================
Property of Joint Venture in Which the Partnership has a 50%
Interest and has Invested in Under an Operating Lease:
Balance, December 31, 1999 $ 551,156 $ 89,768
Depreciation expense -- 7,352
---------------- -----------------
Balance, December 31, 2000 551,156 97,120
Depreciation expense -- 7,352
---------------- -----------------
Balance, December 31, 2001 551,156 104,472
Depreciation expense -- 7,352
---------------- -----------------
Balance, December 31, 2002 $ 551,156 $ 111,824
================ =================
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 2002
Accumulated
Cost Depreciation
----------------- -------------------
Property of Joint Venture in Which the Partnership has a 49%
Interest and has Invested in Under an Operating Lease:
Balance, December 31, 1999 $ 1,076,438 $ 290,501
Depreciation expense -- 26,015
----------------- -----------------
Balance, December 31, 2000 1,076,438 316,516
Depreciation expense -- 26,015
----------------- -----------------
Balance, December 31, 2001 1,076,438 342,531
Depreciation expense -- 26,015
----------------- -----------------
Balance, December 31, 2002 $ 1,076,438 $ 368,546
================= =================
Property of Joint Venture in Which the Partnership has a 64%
Interest and has Invested in Under an Operating Lease:
Balance, December 31, 1999 $ 261,013 $ --
Depreciation expense (i) -- --
----------------- -----------------
Balance, December 31, 2000 261,013 --
Reclassified to operating lease (l) 489,757 --
Depreciation expense -- 9,606
----------------- -----------------
Balance, December 31, 2001 750,770 9,606
Provision for write down of assets (m) (172,165 ) --
Depreciation expense -- 6,404
----------------- -----------------
Balance, December 31, 2002 $ 578,605 $ 16,010
================= =================
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 2002
Accumulated
Cost Depreciation
---------------- -------------------
Property in Which the Partnership has a 33.87% Interest as
Tenants-in-Common and has Invested in Under an Operating Lease:
Balance, December 31, 1999 $ 805,565 $ 95,883
Depreciation expense -- 18,170
---------------- -----------------
Balance, December 31, 2000 805,565 114,053
Depreciation expense -- 18,170
---------------- -----------------
Balance, December 31, 2001 805,565 132,223
Depreciation expense -- 18,170
---------------- -----------------
Balance, December 31, 2002 $ 805,565 $ 150,393
================ =================
Property in Which the Partnership has a 57.91% Interest as
Tenants-in-Common and had Invested in Under an Operating Lease:
Balance, December 31, 1999 $ 1,091,465 $ 47,524
Depreciation expense -- 21,688
---------------- -----------------
Balance, December 31, 2000 1,091,465 69,212
Reclassified to capital lease (k) (650,622 ) (83,911 )
Depreciation expense -- 14,699
---------------- -----------------
Balance, December 31, 2001 440,843 --
Depreciation expense (k) -- --
---------------- -----------------
Balance, December 31, 2002 $ 440,843 $ --
================ =================
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 2002
Accumulated
Cost Depreciation
---------------- ----------------
Property in Which the Partnership has 47% Interest as
Tenants-in-Common and had Invested in Under an Operating Lease:
Balance, December 31, 1999 $ 1,419,290 $ 77,951
Depreciation expense -- 38,500
---------------- ----------------
Balance, December 31, 2000 1,419,290 116,451
Depreciation expense -- 38,500
---------------- ----------------
Balance, December 31, 2001 1,419,290 154,951
Depreciation expense -- 38,500
---------------- ----------------
Balance, December 31, 2002 $ 1,419,290 $ 193,451
================ ================
Property in Which the Partnership has a 37.01%
Interest as Tenants-in-Common and had Invested in
Under an Operating Lease:
Balance, December 31, 1999 $ 2,265,025 $ 92,749
Depreciation expense -- 46,312
---------------- ----------------
Balance, December 31, 2000 2,265,025 139,061
Depreciation expense -- 46,312
---------------- ----------------
Balance, December 31, 2001 2,265,025 185,373
Depreciation expense -- 46,312
---------------- ----------------
Balance, December 31, 2002 $ 2,265,025 $ 231,685
================ ================
Property in Which the Partnership has a 13.38% Interest as
Tenants-in-Common and had Invested in Under an Operating Lease:
Balance, December 31, 1999 $ 1,503,966 $ 54,145
Depreciation expense -- 27,503
---------------- ----------------
Balance, December 31, 2000 1,503,966 81,648
Depreciation expense -- 27,503
---------------- ----------------
Balance, December 31, 2001 1,503,966 109,151
Depreciation expense -- 27,503
---------------- ----------------
Balance, December 31, 2002 $ 1,503,966 $ 136,654
================ ================
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 2002
(b) Depreciation expense is computed for buildings and improvements based
upon estimated lives of 30 years.
(c) As of December 31, 2000, the aggregate cost of the Properties owned by
the Partnership and the joint ventures (including the Properties held
as tenants-in-common) for federal income tax purposes was $ 9,378,528
and $10,881,691, respectively. All of the leases are treated as
operating leases for federal income tax purposes.
(d) The building portion of this Property is owned by the tenant;
therefore, depreciation is not applicable.
(e) The restaurant in Sterling Heights, Michigan, was converted from a
Ponderosa Steakhouse Restaurant to a Lonestar Steakhouse & Saloon
Restaurant in 1994.
(f) The restaurant in Oxford, Alabama, was converted from a KFC Restaurant
to a regional, independent restaurant in 1993.
(g) The restaurant in Lombard, Illinois, was converted from a Taco Bell
restaurant to a Great Clips hair salon in 1996.
(h) The portion of the lease relating to the building has been included in
net investment in direct financing leases; therefore, depreciation is
not applicable.
(i) Certain components of the lease relating to the land and building have
been recorded as a direct financing lease. Accordingly, costs relating
to these components of this lease are not shown.
(j) During the year ended December 31, 1997, the Partnership and an
affiliate as tenants-in-common, purchased land and building from CNL BB
Corp., an affiliate of the General Partners, for an aggregate cost of
$1,091,465.
(k) Effective September 15, 2001, this Property was re-leased, resulting in
a reclassification of the building portion of the lease as a capital
lease.
(l) In January 2002, the lease for this Property was terminated, resulting
in the reclassification of the building portion of the lease as an
operating lease at December 31, 2001. The building was recorded at net
book value as of December 31, 2001 and depreciated over its remaining
estimated life of approximately 26 years.
(m) The undepreciated cost of the Property in Greensboro, North Carolina,
in which the Partnership owns an interest as a joint venture with an
affiliate of the General Partners, was written down to its estimated
fair value. The Partnership recognized the impairment by recording a
provision for write-down of assets in the amount of $172,165 during the
year ended December 31, 2002. The provision represented the difference
between the Property's carrying value and the estimated fair value of
the Property at December 31, 2002. The cost of the Property presented
on this schedule is the net amount at which the Property was carried at
December 31, 2002, including the provision for write-down of assets.
EXHIBIT INDEX
Exhibit Number
(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.)
EXHIBIT 99.1
EXHIBIT 99.2