FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended September 30, 2003
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the transition period from _______________________ to ___________________
Commission file number
0-16824
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CNL Income Fund II, Ltd.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2733859
- ---------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
- ---------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 540-2000
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes___ No X
CONTENTS
Page
Part I.
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 12
Item 4. Controls and Procedures 12-13
Part II.
Other Information 14-15
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
September 30, December 31,
2003 2002
------------------- -------------------
ASSETS
Real estate properties with operating leases, net $ 6,610,579 $ 6,752,686
Investment in joint ventures 3,899,867 4,000,984
Cash and cash equivalents 677,855 1,193,910
Certificate of deposit 60,340 61,824
Receivables 4,977 43,505
Accrued rental income 185,781 182,640
Other assets 11,314 7,045
------------------- -------------------
$ 11,450,713 $ 12,242,594
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 76,156 $ 71,100
Real estate taxes payable 23,772 8,720
Distributions payable 334,380 834,380
Due to related parties 205,056 200,536
Rents paid in advance and deposits 77,017 79,229
------------------- -------------------
Total liabilities 716,381 1,193,965
Commitments and Contingencies (Note 5)
Partners' capital 10,734,332 11,048,629
------------------- -------------------
$ 11,450,713 $ 12,242,594
=================== ===================
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------- ------------ -------------- --------------
Revenues:
Rental income from operating leases $ 250,735 $ 248,491 $ 748,423 $ 786,621
Contingent rental income 16,986 18,505 30,312 28,804
Interest and other income 332 10,351 3,343 15,148
------------- ------------ -------------- --------------
268,053 277,347 782,078 830,573
------------- ------------ -------------- --------------
Expenses:
General operating and administrative 42,790 46,268 144,215 167,257
Property related 4,021 4,497 8,873 18,135
State and other taxes 1,275 -- 9,550 14,946
Depreciation and amortization 45,570 42,680 142,494 139,171
------------- ------------ -------------- --------------
93,656 93,445 305,132 339,509
------------- ------------ -------------- --------------
Income Before Gain on Sale of Assets and
Equity in Earnings of Joint Ventures 174,397 183,902 476,946 491,064
Gain on Sale of Assets -- -- -- 133,603
Equity in Earnings of Joint Ventures 71,184 85,247 211,897 262,712
------------- ------------ -------------- --------------
Income from Continuing Operations 245,581 269,149 688,843 887,379
------------- ------------ -------------- --------------
Discontinued Operations:
Loss from discontinued operations -- (156,740 ) -- (381,718 )
Loss on disposal of discontinued
operations -- (25,967 ) -- (25,967 )
------------- ------------ -------------- --------------
-- (182,707 ) -- (407,685 )
------------- ------------ -------------- --------------
Net Income $ 245,581 $ 86,442 $ 688,843 $ 479,694
============= ============ ============== ==============
Income (Loss) Per Limited Partner Unit:
Continuing Operations $ 4.91 $ 5.38 $ 13.78 $ 17.75
Discontinued Operations -- (3.65 ) -- (8.16 )
------------- ------------ -------------- --------------
$ 4.91 $ 1.73 $ 13.78 $ 9.59
============= ============ ============== ==============
Weighted Average Number of Limited Partner
Units Outstanding 50,000 50,000 50,000 50,000
============= ============ ============== ==============
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Nine Months Ended Year Ended
September 30, December 31,
2003 2002
---------------------- ------------------
General partners:
Beginning balance $ 405,788 $ 405,788
Net income -- --
---------------------- ------------------
405,788 405,788
---------------------- ------------------
Limited partners:
Beginning balance 10,642,841 13,089,704
Net income 688,843 678,046
Distributions ($20.06 and $62.50 per
limited partner unit, respectively) (1,003,140 ) (3,124,909 )
---------------------- ------------------
10,328,544 10,642,841
---------------------- ------------------
Total partners' capital $ 10,734,332 $ 11,048,629
====================== ==================
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2003 2002
--------------- --------------
Net Cash Provided by Operating Activities $ 987,085 $ 1,030,277
--------------- --------------
Cash Flows from Investing Activities:
Proceeds from sale of assets -- 1,065,843
Insurance proceeds for casualty loss on building -- 227,579
--------------- --------------
Net cash provided by investing activities -- 1,293,422
--------------- --------------
Cash Flows from Financing Activities:
Distributions to limited partners (1,503,140 ) (1,970,488 )
--------------- --------------
Net cash used in financing activities (1,503,140 ) (1,970,488 )
--------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents (516,055 ) 353,211
Cash and Cash Equivalents at Beginning of Period 1,193,910 559,886
--------------- --------------
Cash and Cash Equivalents at End of Period $ 677,855 $ 913,097
=============== ==============
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Deferred real estate disposition fee incurred and unpaid at
end of period $ -- $ 32,829
=============== ==============
Distributions declared and unpaid at end of period $ 334,380 $ 743,537
=============== ==============
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2003 and 2002
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of the general partners, necessary for a fair
statement of the results for the interim periods presented. Operating
results for the quarter and nine months ended September 30, 2003, may
not be indicative of the results that may be expected for the year
ending December 31, 2003. Amounts as of December 31, 2002, included in
the financial statements, have been derived from audited financial
statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund II, Ltd. (the "Partnership") for the year ended December
31, 2002.
In January 2003, the Financial Accounting Standards Board ("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 consolidated by a company
if that company is subject to a majority risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only
if it controlled the entity through voting interests. The consolidation
requirements of FIN 46 apply immediately to variable interest entities
created after January 31, 2003, and to older entities, in the first
fiscal year or interim period ending after December 15, 2003. The
general partners believe adoption of this standard may result in either
consolidation or additional disclosure requirements of the
Partnership's unconsolidated joint ventures, which are currently
accounted for under the equity method. However, such consolidation is
not expected to significantly impact the Partnership's results of
operations.
In May 2003, the FASB issued FASB Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity" ("FAS 150"). FAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. FAS 150 will require
issuers to classify certain financial instruments as liabilities (or
assets in some circumstances) that previously were classified as
equity. One requirement of FAS 150 is that minority interests for
majority owned finite lived entities be classified as a liability and
recorded at fair market value. FAS 150 initially applied immediately to
all financial instruments entered into or modified after May 31, 2003,
and otherwise was effective at the beginning of the first interim
period beginning after June 15, 2003. Effective October 29, 2003, the
FASB deferred implementation of FAS 150 as it applies to minority
interests of finite lived Partnerships. The deferral of these
provisions is expected to remain in effect while these interests are
addressed in either Phase II of the FASB's Liabilities and Equity
project or Phase II of the FASB's Business Combinations project;
therefore, no specific timing for the implementation of these
provisions has been stated. The implementation of the currently
effective aspects of FAS 150 did not have an impact on the
Partnership's results of operations.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2003 and 2002
2. Reclassification
Certain items in the prior year's financial statements have been
reclassified to conform to 2003 presentation. These reclassifications
had no effect on total partners' capital or net income.
3. Investment in Joint Ventures
In September 2003, Show Low Joint Venture, in which the Partnership
owns a 64% interest, sold its vacant property in Greensboro, North
Carolina to a third party and recorded a loss on disposal of assets of
approximately $29,500. The joint venture had recorded provisions for
write-down of assets in previous periods relating to this property. The
financial results for this property are reflected as Discontinued
Operations in the condensed financial information presented below.
As of September 30, 2003, Kirkman Road Joint Venture and Holland Joint
Venture, and the Partnership and affiliates, as tenants-in-common in
six separate tenancy-in-common arrangements, each owned one property.
The following presents the combined, condensed financial information
for the joint ventures and the properties held as tenants-in-common
with affiliates at:
September 30, December 31,
2003 2002
------------------ -----------------
Real estate properties with operating
leases, net $ 6,746,839 $ 6,869,725
Net investment in direct financing leases 2,157,090 2,172,748
Real estate held for sale -- 562,600
Cash 524,220 28,744
Accrued rental income 481,784 453,453
Liabilities 46,384 20,985
Partners' capital 9,863,549 10,066,285
Nine MonthsEnded
Quarter Ended September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- ---------------
Revenues $ 286,556 $ 287,658 $ 864,652 $ 861,255
Expenses (44,425 ) (40,530 ) (132,005 ) (133,433 )
------------- ------------- ------------- ---------------
Income from continuing operations 242,131 247,128 732,647 727,822
------------- ------------- ------------- ---------------
Discontinued operations:
Revenues -- -- 94 6,860
Expenses (6,112 ) (17,711 ) (27,957 ) (38,136 )
Provision for write-down of assets -- -- (55,500 ) --
Loss on disposal of assets (29,509 ) -- (29,509 ) --
------------- ------------- ------------- ---------------
(35,621 ) (17,711 ) (112,872 ) (31,276 )
------------- ------------- ------------- ---------------
Net income $ 206,510 $ 229,417 $ 619,775 $ 696,546
============= ============= ============= ===============
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2003 and 2002
3. Investment in Joint Ventures - Continued
The Partnership recognized income of $211,897 and $262,712 during the
nine months ended September 30, 2003 and 2002, respectively, $71,184
and $85,247 of which were earned during the third quarters of 2003 and
2002, respectively, from these joint ventures and tenants-in-common
arrangements.
4. Concentration of Credit Risk
The following schedule presents total rental revenues from individual
lessees, 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 nine months ended September
30:
2003 2002
------------- --------------
Wend Vail Partnership, Ltd. $ 112,500 N/A
Golden Corral Corporation N/A $ 191,308
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 nine months ended September 30:
2003 2002
----------- -------------
Wendy's Old Fashioned
Hamburger Restaurants $ 159,895 $ 159,895
Pizza Hut 122,318 123,636
Golden Corral Family
Steakhouse Restaurants 119,504 198,607
The information denoted by N/A indicates that for each period
presented, the tenant did not represent more than ten percent of the
Partnership's total rental revenues.
Although the Partnership's properties have some geographical diversity
in the United States and the Partnership's lessees operate a variety of
restaurant concepts, default by any of these lessees or restaurant
chains will significantly impact the results of operations of the
Partnership if the Partnership is not able to re-lease the properties
in a timely manner.
5. 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 CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2003 and 2002
6. Subsequent Events
In October 2003, Show Low Joint Venture was dissolved and the
Partnership received approximately $278,900 as its pro-rata share of
the liquidating distribution from the joint venture. No gain or loss
was recognized related to the dissolution. The Partnership owned a 64%
interest in this joint venture.
In October 2003, Chevy's, Inc., the tenant of the property in
Vancouver, Washington which the Partnership owns as tenants-in-common
with affiliates of the general partners, filed for Chapter 11
bankruptcy protection. The Partnership owns a 37.01% interest in this
property. As of November 7, 2003, Chevy's, Inc. had neither rejected
nor affirmed the lease related to this property.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund II, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on November 13, 1986 to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurant properties, as well as land upon which restaurants were to
be constructed, which are leased primarily to operators of national and regional
fast-food restaurant chains (collectively, the "Properties"). The leases
generally are triple-net leases, with the lessees responsible for all repairs
and maintenance, property taxes, insurance and utilities. As of September 30,
2002, the Partnership owned 19 Properties directly and nine Properties
indirectly through joint venture or tenancy in common arrangements. As of
September 30, 2003, the Partnership owned 17 Properties directly and eight
Properties indirectly through joint venture or tenancy in common arrangements.
Capital Resources
Cash from operating activities was $987,085 and $1,030,277 for the nine
months ended September 30, 2003 and 2002, respectively. Other sources and uses
of cash included the following during the nine months ended September 30, 2003.
In September 2003, Show Low Joint Venture, in which the Partnership
owns a 64% interest, sold its Property in Greensboro, North Carolina to a third
party and received net sales proceeds of approximately $468,900, resulting in a
loss to the joint venture of approximately $29,500. The joint venture had
recorded provisions for write-down of assets relating to this Property in
previous periods. In October 2003, the Partnership received approximately
$278,900 as its pro-rata share of the liquidating distribution from the joint
venture. The Partnership intends to use a portion of these proceeds to make a
special distribution to the limited partners and to use the remaining proceeds
to pay liabilities of the Partnership.
At September 30, 2003, the Partnership had $677,855 in cash and cash
equivalents, as compared to $1,193,910 at December 31, 2002. At September 30,
2003, these funds were held in demand deposit accounts at commercial banks. The
decrease in cash and cash equivalents at September 30, 2003, as compared to
December 31, 2002, was primarily a result of the Partnership paying a special
distribution to the limited partners during the nine months ended September 30,
2003, which was accrued at December 31, 2002. The funds remaining at September
30, 2003 will be used toward the payment of distributions and other liabilities
of the Partnership.
In October 2003, Chevy's, Inc., the tenant of the Property in
Vancouver, Washington which the Partnership owns as tenants-in-common with
affiliates of the general partners, filed for Chapter 11 bankruptcy protection.
The Partnership owns a 37.01% in this Property. As of November 7, 2003, Chevy's,
Inc. had neither rejected nor affirmed the lease related to this Property. The
lost revenues that would result if the lease were to be rejected, will have an
adverse effect on the equity in earnings of joint ventures of the Partnership if
the tenancy in common is not able to re-lease or sell the Property in a timely
manner.
Short-Term Liquidity
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will generate net cash flow in
excess of operating expenses.
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of operating expenses of the Partnership, to the extent that
the general partners determine that such funds are available for distribution.
Based on current and anticipated future cash from operations, and for the nine
months ended September 30, 2002, sales proceeds and insurance proceeds, the
Partnership declared distributions to limited partners $1,003,140 and
$2,290,529, for the nine months ended September 30, 2003 and 2002, respectively
($334,380 and $743,537 for the quarters ended September 30, 2003 and 2002,
respectively.) This represents distributions of $20.06 and $45.81 per unit for
the nine months ended September 30, 2003 and 2002, respectively ($6.69 and
$14.87 per unit for each applicable quarter.) Distributions for the nine months
ended September 30, 2002 included $1,100,000 in special distributions as a
result of the distribution of net sales proceeds from the sale of the Property
in San Antonio, Texas and insurance proceeds received relating to the Property
in Casper, Wyoming. The special distributions were effectively a return of a
portion of the limited partners' investment, although, in accordance with the
Partnership agreement, $637,100 was applied toward the limited partners' 10%
Preferred Return and the balance of $462,900 was treated as a return of capital
for purposes of calculating the limited partners' 10% Preferred Return. As a
result of the return of capital, the amount of the limited partners' invested
capital contributions (which generally is the limited partners' capital
contributions, less distributions from the sale of a Property that are
considered to be a return of capital) was decreased; therefore, the amount of
the limited partners' invested capital contributions on which the 10% Preferred
Return is calculated was lowered. As a result of the sales of Properties in
2002, the Partnership's total revenues have declined and are expected to remain
reduced in subsequent periods, while the majority of the Partnership's operating
expenses have remained and are expected to remain fixed. Due to the sales of
Properties mentioned above, and due to current and anticipated cash from
operations, distributions of net cash flow have been adjusted during the
quarters ended September 30, 2002 and December 31, 2002. No distributions were
made to the general partners for the quarters and nine months ended September
30, 2003 and 2002. The Partnership intends to continue to make distributions of
cash available for distribution to the limited partners on a quarterly basis.
Total liabilities, including distributions payable, were $716,381 at
September 30, 2003, as compared to $1,193,965 at December 31, 2002. The decrease
in total liabilities was primarily a result of the Partnership paying a special
distribution to the limited partners that had been accrued at December 31, 2002.
Total liabilities at September 30, 2003, 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 general partners' future capital contributions or loans.
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. Phase one of the clean-up work was finalized in
the previous year, and the Department of Environmental Protection approved the
findings. During the first quarter of 2003, phase two of the clean-up work
commenced.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Total rental revenues were $748,423 for the nine months ended September
30, 2003, as compared to $786,621 during the same period of 2002, $250,735 and
$248,491 of which were earned during the third quarters of 2003 and 2002,
respectively. The decrease in rental revenues during the nine months ended
September 30, 2003 was primarily due to the 2002 sale of the Property in San
Antonio, Texas. Rental revenues earned from wholly owned Properties are expected
to remain at reduced amounts as a result of the Partnership distributing the net
sales proceeds from the sale of this Property to the limited partners during
2002. The Partnership also earned $30,312 in contingent rental revenues during
the nine months ended September 30, 2003, as compared to $28,804 during the same
period of 2002, $16,986 and $18,505 of which were earned during the third
quarters of 2003 and 2002, respectively.
The Partnership also earned $211,897 attributable to net income earned
by joint ventures during the nine months ended September 30, 2003, as compared
to $262,712 during the same period of 2002, $71,184 and $85,247 of which were
earned during the third quarters of 2003 and 2002, respectively. Net income
earned by joint ventures was lower during the quarter and nine months ended
September 30, 2003 because Houlihan's Restaurant, Inc., which leased the
Property owned by Show Low Joint Venture, filed for bankruptcy in January 2002
and rejected the lease relating to this Property. As a result, the joint
venture, in which the Partnership owns a 64% interest, stopped recording rental
revenues relating to this Property. In addition, during the nine months ended
September 30, 2003, Show Low Joint Venture recorded a provision for write-down
of assets of $55,500 relating to this Property. The provision represented the
difference between the Property's net carrying value and its estimated fair
value. In September 2003, the joint venture sold this vacant Property to a third
party and recorded an additional loss of approximately $29,500. In October 2003,
the joint venture was liquidated, and as a result, net income earned by joint
ventures is expected to remain at reduced amounts.
During the nine months ended September 30, 2003, one of the
Partnership's lessees, Wend Vail Partnership, Ltd., contributed more than 10% of
the Partnership's total rental revenues (including the Partnership's share of
rental revenues from the Properties owned by joint ventures and the Properties
owned with affiliates of the general partners as tenants-in-common). It is
anticipated that based on the minimum annual rental payments required by the
leases, this lessee will continue to contribute more than 10% of the
Partnership's total rental revenues. In addition, during the nine months ended
September 30, 2003, three restaurant chains, Wendy's Old Fashioned Hamburger
Restaurants, Pizza Hut, and Golden Corral Family Steakhouse Restaurants, each
accounted for more than 10% of the Partnership's total rental revenues
(including the Partnership's share of the rental revenues from the Properties
owned by joint ventures and the Properties owned with affiliates of the general
partners as tenants-in-common). It is anticipated that these three restaurant
chains each 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 lessee or these restaurant chains will materially affect the
Partnership's operating results if the Partnership is not able to re-lease the
Properties in a timely manner.
Operating expenses, including depreciation and amortization, were
$305,132 during the nine months ended September 30, 2003, as compared to
$339,509 during the same period of 2002, $93,656 and $93,445 of which were
incurred during the third quarters of 2003 and 2002, respectively. The decrease
in operating expenses during the nine months ended September 30, 2003, as
compared to the same period in 2002, was partially due to a decrease in the
costs incurred for administrative expenses for servicing the Partnership and its
Properties and a decrease in state tax expense relating to several states in
which the Partnership conducts business.
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. Because this Property was
identified for sale prior to the January 2002 implementation of Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets", the results of operations relating to this
Property were included as Income from Continuing Operations in the accompanying
financial statements.
During the year ended December 31, 2002, the Partnership identified and
sold four Properties that were classified as Discontinued Operations in the
accompanying financial statements. The Partnership recognized a net rental loss
(rental revenues less Property related expenses and provisions for write-down of
assets) of $156,740 and $381,718 during the quarter and nine months ended
September 30, 2002, respectively, relating to the Properties in Pineville,
Louisiana; Tomball, Texas; and Casper and Rock Springs, Wyoming. The net rental
loss during the quarter and nine months ended September 30, 2002 was a result of
the Partnership recording provisions for write-down of assets. The Partnership
recorded a provision for write-down of assets of approximately $139,800 during
the quarter and nine months ended September 30, 2002 relating to the October
2002 sale of the vacant Property in Tomball, Texas. The tenant vacated the
Property in May 2002, when the lease expired. During the nine months ended
September 30, 2002, the Partnership also recorded a provision for write-down of
assets of approximately $181,200 relating to the Property in Pineville,
Louisiana. The tenant vacated the Property in June 2002, when the lease expired.
The Partnership sold this Property in December 2002. The Partnership recorded
provisions for write-down of assets of approximately $177,300 in June 2002
relating to the August 2002 sale of the vacant Properties in Casper and Rock
Springs, Wyoming. In 2001, the tenant of the Rock Springs Property filed for
bankruptcy and rejected the lease related to this Property. In October 2001, the
Casper Property was destroyed by fire. The provisions represented the difference
between the carrying value of the Properties and their estimated fair value.
During the nine months ended September 30, 2002, the Partnership received
approximately $88,800 in insurance proceeds relating to the Property in Casper,
Wyoming. In August 2002, the Partnership sold the Properties in Casper and Rock
Springs, Wyoming, resulting in a loss on disposal of assets of approximately
$26,000 during the quarter and nine months ended September 30, 2002. The
Partnership has not sold any Properties during 2003.
In September 2003, Show Low Joint Venture sold its Property in
Greensboro, North Carolina, as described above. The financial results relating
to this Property were classified as Discontinued Operations in the combined,
condensed financial information for the joint ventures and the Properties held
with affiliates of the general partners as tenants-in-common reported in the
footnotes to the accompanying financial statements. The Partnership's pro-rata
share of these amounts was included in equity in earnings of joint ventures in
the accompanying financial statements.
In January 2003, the Financial Accounting Standards Board ("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 consolidated by a company if that
company is subject to a majority risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. Prior to FIN 46, a company generally included another entity in
its consolidated financial statements only if it controlled the entity through
voting interests. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003, and to older
entities, in the first fiscal year or interim period ending after December 15,
2003. The general partners believe adoption of this standard may result in
either consolidation or additional disclosure requirements of the Partnership's
unconsolidated joint ventures, which are currently accounted for under the
equity method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
In May 2003, the FASB issued FASB Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("FAS 150"). FAS 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. FAS 150 will require issuers to classify certain
financial instruments as liabilities (or assets in some circumstances) that
previously were classified as equity. One requirement of FAS 150 is that
minority interests for majority owned finite lived entities be classified as a
liability and recorded at fair market value. FAS 150 initially applied
immediately to all financial instruments entered into or modified after May 31,
2003, and otherwise was effective at the beginning of the first interim period
beginning after June 15, 2003. Effective October 29, 2003, the FASB deferred
implementation of FAS 150 as it applies to minority interests of finite lived
Partnerships. The deferral of these provisions is expected to remain in effect
while these interests are addressed in either Phase II of the FASB's Liabilities
and Equity project or Phase II of the FASB's Business Combinations project;
therefore, no specific timing for the implementation of these provisions has
been stated. The implementation of the currently effective aspects of FAS 150
did not have an impact on the Partnership's results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
The general partners maintain a set of disclosure controls and
procedures designed to ensure that information required to be disclosed in the
Partnership's filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The principal executive
and financial officers of the corporate general partner have evaluated the
Partnership's disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q and have determined that such
disclosure controls and procedures are effective.
There was no change in internal control over financial reporting that
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
-----------------
Item 2. Changes in Securities. Inapplicable.
---------------------
Item 3. Defaults upon Senior Securities. Inapplicable.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
---------------------------------------------------
Item 5. Other Information. Inapplicable.
-----------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund
II, Ltd. (Included as Exhibit 3.1 to Amendment No. 1
to Registration Statement No. 33-10351 on Form S-11
and incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of
Limited Partnership of CNL Income Fund II, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with the
Securities and Exchange Commission on April 2, 1993,
and incorporated herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund
II, Ltd. (Included as Exhibit 4.1 to Amendment No. 1
to Registration Statement No. 33-10351 on Form S-11
and incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of
Limited Partnership of CNL Income Fund II, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with the
Securities and Exchange Commission on April 2, 1993,
and incorporated herein by reference.)
10.1 Property Management Agreement (Included as Exhibit
10.1 to Form 10-K filed with the Securities and
Exchange Commission on April 2, 1993, and incorporated
herein by reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc.
(Included as Exhibit 10.2 to Form 10-K filed with the
Securities and Exchange Commission on March 30, 1995,
and incorporated herein by reference.)
10.3 Assignment of Property Management Agreement from CNL
Income Fund Advisors, Inc. to CNL Fund Advisors, Inc.
(Included as Exhibit 10.3 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996
and incorporated herein by reference.)
10.4 Assignment of Management Agreement from CNL Fund
Advisors, Inc. to CNL APF Partners, LP. (Included as
Exhibit 10.4 to Form 10-Q filed with the Securities
and Exchange Commission on August 13, 2001, and
incorporated herein be reference.)
10.5 Assignment of Management Agreement from CNL APF
Partners, LP to CNL Restaurants XVIII, Inc. (Included
as Exhibit 10.5 to Form 10-Q filed with the Securities
and Exchange Commission on August 14, 2002, and
incorporated herein by reference.)
31.1 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. (Filed herewith.)
31.2 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. (Filed herewith.)
32.1 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.)
32.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith.)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 10th day of November, 2003.
CNL INCOME FUND II, LTD.
By: CNL REALTY CORPORATION
General Partner
By:/s/ James M. Seneff, Jr.
------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By:/s/ Robert A. Bourne
------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit Number
(c) Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to
Registration Statement No. 33-10351 on Form S-11 and
incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as
Exhibit 3.2 to Form 10-K filed with the Securities and
Exchange Commission on April 2, 1993, and incorporated
herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 4.1 to Amendment No. 1 to
Registration Statement No. 33-10351 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as
Exhibit 3.2 to Form 10-K filed with the Securities and
Exchange Commission on April 2, 1993, and incorporated
herein by reference.)
10.1 Property Management Agreement (Included as Exhibit 10.1 to
Form 10-K filed with the Securities and Exchange
Commission on April 2, 1993, and incorporated herein by
reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc.
(Included as Exhibit 10.2 to Form 10-K filed with the
Securities and Exchange Commission on March 30, 1995, and
incorporated herein by reference.)
10.3 Assignment of Property Management Agreement from CNL
Income Fund Advisors, Inc. to CNL Fund Advisors, Inc.
(Included as Exhibit 10.3 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996 and
incorporated herein by reference.)
10.4 Assignment of Management Agreement from CNL Fund Advisors,
Inc. to CNL APF Partners, LP. (Included as Exhibit 10.4 to
Form 10-Q filed with the Securities and Exchange
Commission on August 13, 2001, and incorporated herein be
reference.)
10.5 Assignment of Management Agreement from CNL APF Partners,
LP to CNL Restaurants XVIII, Inc. (Included as Exhibit
10.5 to Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2002, and incorporated herein by
reference.)
31.1 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.
(Filed herewith.)
31.2 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.
(Filed herewith.)
32.1 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.)
32.2 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 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2