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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 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 Section12 (b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section12(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, 2000, the Partnership owned 33 Properties, either
directly or indirectly through joint venture or tenancy in common arrangements.
During the year ended December 31, 2001, the Partnership sold its Property in
Bay City, Texas, and Peoria Joint Venture, in which the Partnership owned 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. 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. During 2003,
Show Low Joint Venture, in which the Partnership owned a 64% interest, sold its
Property and the Partnership and, the joint venture partner liquidated the joint
venture. As of December 31, 2003 the Partnership owned 25 Properties. The 25
Properties include interests in two 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 taxes. 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 5 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 25 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, Houlihan's Restaurant, Inc., the tenant of the
Property owned by Show Low Joint Venture, filed for bankruptcy and rejected the
lease relating to the Property in Greensboro, North Carolina. In September 2003,
the joint venture sold this Property. In December 2003, the Partnership and the
joint venture partner liquidated the joint venture and the Partnership received
its pro rata share of the liquidating distribution in December 2003.
During August 2002, the lease relating to the Golden Corral Property in
Nederland, Texas expired; a new contract was signed with the Partnership through
December 2002. The tenant continued to operate under a month-to-month lease
until December 2003. During January 2004, the tenant abandoned the property. The
lost revenues will have an adverse effect on the results of operations of the
Partnership if the Partnership is unable to lease the Properties in a timely
manner.
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. While the tenant has
neither rejected nor affirmed the one lease it has with the Partnership, there
can be no assurance that the lease will not be rejected in the future. The lost
revenues that would result if the tenant rejects this lease 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 the Property in a timely manner.
Major Tenants
During 2003, none of the Partnership's lessees contributed more than
ten percent of 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). In addition during
2003, two Restaurant Chains, Pizza Hut and Wendy's, each accounted for more than
ten percent of 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 2004, it is
anticipated that these two Restaurant Chains each will continue to account for
more than 10% of the rental revenues to which the Partnership is entitled under
the terms of its leases. A failure of these Restaurant Chains will 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, 2003, 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, 2003:
Entity Name Year Ownership Partners Property
Kirkman Road Joint Venture 1987 50.00% Various third party partners Orlando, FL
Holland Joint Venture 1988 49.00 % CNL Income Fund IV, Ltd. Holland, MI
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
Property or 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 Property or 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 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 Partnership had entered into a joint venture arrangement, Show Low
Joint Venture, with an affiliate of the General Partners, to purchase and hold a
Property. During 2003, Show Low Joint Venture was liquidated upon the sale of
the Property held by the joint venture and the net sales proceeds were
distributed to each joint venture partner in accordance with the terms of the
joint venture agreement.
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. ("the Advisor"), an affiliate of the General
Partners, provides certain services relating to the management of the
Partnership and its Properties pursuant to a management agreement with the
Partnership. 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 has 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.
During 2003, CNL Capital Management, Inc., ("CCM"), a wholly owned
subsidiary of CNL Financial Group, Inc., began providing certain strategic
advisory services to the General Partners relative to the Partnership's
business. CCM is not reimbursed for these services by the Partnership. CCM also
began providing some accounting and portfolio management services to the
Partnership during 2003, through a subcontract with the Advisor.
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, the officers and employees of CNL Restaurant Properties, Inc.
(formerly CNL American Properties Fund, Inc.), the parent company of the
Advisor, and the officers and employees of CCM 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, 2003, the Partnership owned 25 Properties. Of the 25
Properties, 17 are owned by the Partnership in fee simple, two 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.
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, 2003 by state.
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 1
Tennessee 1
Texas 5
Washington 1
--------------
TOTAL PROPERTIES: 25
==============
Buildings. Each of the Properties 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, 2003, 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, 2003, 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
$10,326,413, respectively.
The following table lists the Properties owned by the Partnership,
directly and indirectly, as of December 31, 2003, by Restaurant Chain.
Restaurant Chain Number of Properties
Arby's 1
Checkers 2
Chevy's Fresh Mex 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 25
==============
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
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.
The following is a schedule of the average rent per property and
occupancy rate for the years ended December 31:
2003 2002 2001 2000 1999
------------- ------------- -------------- ------------- --------------
Rental Revenues (1)(2) $1,511,926 $ 1,532,701 $ 1,781,716 $ 2,142,668 $2,255,787
Properties (2) 25 25 29 32 37
Average Rent Per Property
$60,477 $ 61,308 $ 61,438 $ 66,958 $ 60,967
Occupancy Rate 100% 96% 94% 97% 100%
(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, 2003, for each of the next ten years and thereafter.
Percentage of
Expiration Year Number of Annual Rental Gross Annual
Leases Revenues Rental Income
-------------------- -------------- ------------------- --------------------
2004 1 $ 96,600 7.24%
2005 2 65,502 4.91%
2006 1 63,193 4.73%
2007 8 445,083 33.34%
2008 1 16,530 1.24%
2009 -- -- --
2010 -- -- --
2011 2 146,419 10.97%
2012 2 162,744 12.19%
2013 1 58,921 4.41%
Thereafter 6 279,887 20.97%
-------------- ------------------- --------------------
Totals (1) 24 $ 1,334,879 100.00%
============== =================== ====================
(1) Excludes the Property in Nederland, Texas for which the lease expired and
the tenant continued to operate under a month-to-month lease until the
tenant vacated the property in January 2004.
Leases with Major Tenant
The terms of the leases with the Partnership's major tenants as of
December 31, 2002 (see Item 1. Business - Major Tenants), are substantially the
same as those described in Item 1. Business - Leases.
During 2003, none of the Partnership's lessees contributed more than
ten percent of the Partnership's 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).
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 12, 2004, there were 2,159 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 2003, 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 to $475 per Unit. From July 2000 through
December 2003, due primarily to the continued sales of Properties, the price
paid for any Unit transferred pursuant to the Plan ranged from $357 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 2003 and 2002 other than
pursuant to the Plan, net of commissions.
2003 (1) 2002 (1)
----------------------------------- ------------------------------------
High Low Average High Low Average
--------- -------- ---------- ---------- --------- ----------
First Quarter $ 336 $ 220 $285 $ 280 $198 $ 227
Second Quarter 315 208 260 275 215 249
Third Quarter 357 237 307 252 215 225
Fourth Quarter 217 160 188 300 276 290
(1) A total of 277 and 582 Units were transferred other than pursuant to
the Plan for the years ended December 31, 2003 and 2002, 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, 2003 and 2002, the Partnership
declared distributions to the limited partners of $1,462,520 and $3,124,909,
respectively. Distributions for the year ended December 31, 2003 and 2002,
included $125,000 and $1,600,000, respectively, 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, $125,000 and $866,124, respectively, were applied toward the limited
partners' 10% Preferred Return and the balances of $0 and $733,876 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) decreased; therefore, the amount
of the limited partners' capital on which the 10% Preferred Return is calculated
was lowered accordingly. As a result of the sale of the properties in 2003 and
2002, 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, 2002 and
December 31, 2002, and the quarter ended December 31, 2003, 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 2003 2002
------------------------- --------------- ----------------
March 31 $ 334,380 $ 423,496
June 30 334,380 1,123,496
September 30 334,380 743,537
December 31 459,380 834,380
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
2003 2002 2001 2000 1999
------------- -------------- ------------- ------------ ------------
Year ended December 31:
Continuing Operations (3):
Revenues $ 1,073,585 $ 1,141,803 $ 1,245,141 $1,397,091 $1,489,651
Equity in earnings of
unconsolidated joint venture 303,140 253,111 441,969 443,567 440,215
Income from continuing
operations (1) 979,190 1,095,542 1,442,574 2,099,613 1,474,822
Discontinued Operations (3):
Revenues -- 83,134 177,623 268,444 314,523
Income (loss) from and loss on
disposal of discontinued
operations (2) -- (417,496 ) (188,828 ) 175,956 224,556
Net income 979,190 678,046 1,253,746 2,275,569 1,699,378
Income (loss) per Unit:
Continuing operations $ 19.58 $ 21.91 $ 28.85 $ 41.99 $ 29.50
Discontinued operations -- (8.35 ) (3.78 ) 3.52 4.49
------------- -------------- ------------- ------------ ------------
Total $ 19.58 $ 13.56 $ 25.07 $ 45.51 $ 33.99
============= ============== ============= ============ ============
Cash distributions declared (4) $ 1,462,520 $ 3,124,909 $ 2,913,6500 $4,397,916 $2,062,516
Cash distributions declared per
unit (4) 29.25 62.50 58.27 87.96 41.25
At December 31:
Total assets $ 11,400,102 $ 12,242,594 $14,193,243 $15,833,995 $18,026,218
Partners' capital 10,565,299 11,048,629 13,495,492 15,155,396 17,277,743
(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, and 2000, has
been reduced by real estate disposition fees of $22,500, $16,620, and
$71,056, as a result of the sales of several Properties. Income from
continuing operations for the year ended December 31, 2001, also
includes lease termination income of $13,112.
(2) Income (loss) from and loss on disposal of 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. The year ended December 31, 2002 also
includes losses on disposal of discontinued operations of $25,967. 2001
includes provisions for write-down of assets of $223,550. The year
ended December 31, 2002 includes real estate disposition fees of
$32,829 as a result of the sales of several Properties.
(3) Certain items in the prior years financial data have been reclassified
to conform to the 2003 presentation. These reclassifications had no
effect on net income. The results of operations relating to properties
that were either identified for sale and disposal of subsequent to
January 1, 2002 or were classified as held for sale as of December 31,
2003 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.
(4) Distributions for the years ended December 31, 2003, 2002, 2001, and
2000 include special distributions to the Limited Partners of $125,000,
$1,600,000, $1,200,000, and $2,500,000, respectively, as a result of
the distributions of the net sales proceeds from the sales of several
Properties and 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 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 17, 17, and 22, Properties directly as of
December 31, 2003, 2002 and 2001, respectively. In addition, the Partnership
owned eight, nine, and nine Properties indirectly through joint venture or
tenancy in common arrangements, as of December 31, 2003, 2002 and 2001,
respectively.
Capital Resources
For the years ended December 31, 2003, 2002, and 2001, cash from
operating activities was $1,285,713, $1,334,027 and $1,671,766, respectively.
The decrease in cash from operating activities during both 2003 and 2002, as
compared to the same period in the previous year resulted from changes in the
Partnership's income and expenses.
Other sources and uses of cash included the following during the years
ended December 31, 2003, 2002, and 2001.
During 2003, 2002, and 2001, the Partnership distributed to the Limited
Partners the majority of the insurance proceeds from a 2001 loss due to fire,
liquidating proceeds from a 2003 and 2001 dissolution of joint ventures, and net
sales proceeds from sales of Properties in 2002 and 2001, except as indicated.
These transactions are described below.
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 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. In
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 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 a loss on disposal of assets of approximately $10,600.
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 in June 2002, in connection with the anticipated sale of this
property, the Partnership recorded a provision for write-down of assets of
approximately $113,600. 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
approximately $15,300.
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 the Property to an unrelated third party 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.
During 2003, Show Low Joint Venture, in which the Partnership owned 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 the fourth quarter of 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.
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 March 12, 2004, Chevy's,
Inc. had neither rejected nor affirmed the lease related to this Property. The
lost revenues that would result, if the lease were rejected, will have an
adverse effect on the equity in earnings of unconsolidated joint ventures of the
Partnership if the tenancy in common is not able to re-lease or sell the
Property in a timely manner.
During the year ended December 31, 2003, the Partnership incurred no
deferred, subordinated, real estate disposition fees. In connection with the
sales of the properties in 2002 and 2001, the Partnership incurred deferred,
subordinated, real estate disposition fees of $55,329 and $16,620, respectively.
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, at 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.
At December 31, 2003, the Partnership had $922,370 invested in cash and
cash equivalents, as compared to $1,193,910 at December 31, 2002. At December
31, 2003, these funds were held in a demand deposit accounts at a commercial
bank. The decrease in cash and cash equivalents was primarily a result of the
Partnership distributing to the Limited Partners, in the form of a special
distribution as described below, sales proceeds that were held at December 31,
2002. As of December 31, 2003, the average interest rate earned on rental income
held in the demand deposit account at the commercial bank was less than one
percent annually. The funds remaining at December 31, 2003, after the payment of
distributions and other liabilities, will be used to meet the Partnership's
working capital needs.
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 2003, 2002, and
2001, the Partnership declared distributions to the Limited Partners of
$1,462,520, $3,124,909, and $2,913,650, for years ended December 31, 2003, 2002,
and 2001, respectively. This represents distributions of $29.25, $62.50, and
$58.27, per Unit for the years ending in December 31, 2003, 2002, and 2001,
respectively. Distributions for the year ended December 31, 2003, 2002, and
2001, included $125,000, $1,600,000, and $1,200,000 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, $125,000, $866,124, and $657,471 were applied toward the Limited
Partners' 10% Preferred Return and the balances of $0, $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 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 and 2001, the Partnership's total revenue has decreased,
while the majority of the Partnership's operating expenses remained somewhat
fixed. Therefore, distributions of net cash flow have been adjusted in the
quarter ended September 30, 2000, with subsequent adjustments in the quarter
ended December 31, 2002. No distributions were made to the General Partners for
the years ended December 31, 2003, 2002, and 2001. The Partnership intends to
continue to make distributions of cash available 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, 2003, 2002 and 2001.
As of December 31, 2003 and 2002, the Partnership owed $9,093 and
$12,381, respectively, to affiliates for operating expenses and accounting and
administrative services. As of March 12, 2004, the Partnership had reimbursed
the affiliates for these amounts. In addition, as of December 31, 2003 and 2002,
the Partnership owed $188,155 to affiliates for real estate disposition fees
resulting from services rendered in connection with the sales 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, decreased to $637,555 at December 31, 2003, from $993,429 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 that was larger than the special distribution that
was accrued at December 31, 2003. The General Partners believe that the
Partnership has sufficient cash on hand to meet its current working capital
needs.
Off-Balance Sheet Transactions
The Partnership holds interests in various unconsolidated joint venture
and tenancy in common arrangements that are accounted for using the equity
method. The General Partners do not believe that any such interest would
constitute an off-balance sheet arrangement requiring any additional disclosures
under the provisions of the Sarbanes-Oxley Act of 2002.
Contractual Obligations, Contingent Liabilities, and Commitments
The Partnership has no contractual obligations, contingent liabilities,
or commitments as of December 31, 2003.
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 Financial Accounting Standards 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.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"). Accordingly, when the Partnership
makes the decision to sell or commits to a plan to sell a Property within one
year, its operating results are reported as discontinued operations.
Results of Operations
Comparison of the year ended December 31, 2003 to the year ended December 31,
2002
Rental revenues from continuing operations were $977,171 for the year
ended December 31, 2003 as compared to $1,035,106 during the same period in
2002. The decrease in rental revenues from continuing operations during 2003 was
primarily due to the sale of the Property in San Antonio, Texas in 2002. Rental
revenues from continuing operations 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.
During the year ended December 31, 2003 and 2002, the Partnership also
earned $92,737 and $89,048, respectively, in contingent rental income. The
increase was primarily attributable to an increase in gross sales of certain
restaurant Properties, the leases of which require the payment of contingent
rental income.
During the year ended December 31, 2003 and 2002, the Partnership
earned $303,140 and $253,111, respectively, attributable to the net income
earned by joint ventures. The increase in net income earned by joint ventures
during 2003, 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 owned 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 in 2002. An additional provision of $55,500
was recorded in 2003 relating to this Property. The provision represented the
difference between the carrying value of the Property 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 2003, none of the Partnership's lessees contributed more than
ten percent of 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), but two Restaurant
Chains, Pizza Hut and Wendy's, each accounted for more than ten percent of
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 2004, it is anticipated that these
two Restaurant Chains each will continue to account for more than 10% of the
rental revenues to which the Partnership is entitled under the terms of its
leases. Any failure of these Restaurant Chain will 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, 2003, 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.
During the year ended December 31, 2003 and 2002, the Partnership also
earned $3,677 and $17,649, respectively, in interest and other income. Interest
and other income during 2002 was higher because the Partnership was awarded an
amount during 2002 related to a right-of-way taking at one of its Properties.
Operating expenses, including depreciation and amortization expenses
were $397,535 and $432,975 for the years ended December 31, 2003 and 2002,
respectively. The decrease in operating expenses 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 FAS 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 2002, the Partnership identified and sold four Properties that
were classified as Discontinued Operations in the accompanying financial
statements. 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. In 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 a loss on
disposal of assets of $10,626.
During 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 the
Denny's in Rock Springs, Wyoming. In June 2002, in connection with the
anticipated sale of this Property, the Partnership recorded a provision for
write-down of assets of approximately $113,600. The Partnership has also
recorded a provision for write-down of assets in previous years. 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 approximately $15,300.
In June 2002, the Partnership recorded a provision for write-down of
assets of approximately $181,200 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 approximately $139,800 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.
In September 2003, Show Low Joint Venture, in which the Partnership
owned a 64% interest, 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 December 2003, Holland Joint Venture, in which the Partnership owns
a 49% interest, entered into negotiations with a third party to sell the
Property in Holland, Michigan. As a result, the joint venture reclassified the
assets relating to this property from land and building on operating leases to
real estate held for sale. The Property was recorded at the lower of its
carrying amount or fair value less cost to sell. In addition, the joint venture
stopped recording depreciation upon identifying the Property as held for sale.
The financial results for this property are reflected as Discontinued Operations
in the condensed joint venture financial information presented in the footnotes
to the accompanying financial statements.
Comparison of the year ended December 31, 2002 to the year ended December 31,
2001
Rental revenues from continuing operations 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 from continuing operations 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 continuing operations 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, 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 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 leases 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 owned 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 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.
During the year ended December 31, 2002 and 2001, the Partnership
earned $17,649 and $41,240, respectively, in interest and other income. Interest
and other income during 2001 was higher because 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 was primarily due to a decrease in depreciation expense because the
Partnership sold Properties in 2002 and 2001.
In June 2002, the Partnership sold its Burger King Property in San
Antonio, Texas resulting in a gain of approximately $133,600. This Property was
identified for sale as of December 31, 2001. In September 2001, the Partnership
sold its Property in Bay City, Texas to the tenant resulting in a gain of
approximately $204,200.
During the year ended December 31, 2001, the Property located in
Casper, Wyoming, was partially destroyed by fire and subsequently demolished.
During the year ended December 31, 2001, the Partnership recorded a provision
for write-down of assets of approximately $78,000, which represented the loss
incurred by the Partnership in excess of anticipated insurance proceeds. In June
2002, an additional provision of approximately $63,700 was recorded. In August
2002, the Partnership sold the Land to a third party.
The Partnership recorded provisions for write-down of assets of
approximately $113,600 and $145,500 in the years ended December 31, 2002 and
2001, respectively, relating to the Denny's Property in Rock Springs, Wyoming
because of the PRG, bankruptcy. The provisions represented the difference
between the carrying value of the Property and its estimated fair value. In
August 2002, the Partnership sold the Property.
In June 2002, the Partnership recorded a provision for write-down of
assets of approximately $181,200 relating to the Property in Pineville,
Louisiana when the tenant opted to not renew its lease. In December 2002, the
Partnership sold this Property.
In September 2002, the Partnership recorded a provision for write-down
of assets of approximately $139,800 relating to the Property in Tomball, Texas.
This Property had been 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.
The General Partners continuously evaluate strategic alternatives for
the Partnership, including alternatives to provide liquidity to the Limited
Partners.
The Partnership's leases as of December 31, 2003 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, 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, 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. In December 2003, the FASB issued FASB Interpretation No. 46R
("FIN 46R"), to clarify some of the provisions of FIN 46. Under FIN 46R, special
effective date provisions apply to entities that have fully or partially applied
FIN 46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities is required
in financial statements for periods ending after March 15, 2004. The Partnership
did not fully or partially apply FIN 46 prior to the issuance of FIN 46R. Also,
the Partnership does not have interests in structures commonly referred to as
special-purpose entities. Therefore, application of FIN 46R is required in the
Partnership's financial statements for periods ending after March 15, 2004. 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.
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 26-39
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, 2003 and 2002 and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2003
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 Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
March 24, 2004
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2003 2002
----------------- -----------------
ASSETS
Real estate properties with operating leases, net $ 6,565,138 $ 6,752,686
Investment in joint ventures 3,621,892 4,000,984
Cash and cash equivalents 922,370 1,193,910
Certificate of deposit 60,483 61,824
Receivables, less allowance for doubtful accounts of
$28,888, in 2003 38,192 43,505
Accrued rental income 185,490 182,640
Other assets 6,537 7,045
----------------- -----------------
$ 11,400,102 $ 12,242,594
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 71,534 $ 71,100
Real estate taxes payable 21,680 8,720
Distributions payable 459,380 834,380
Due to related parties 197,248 200,536
Rents paid in advance and deposits 84,961 79,229
----------------- -----------------
Total liabilities 834,803 1,193,965
Commitments and Contingencies (Note 9)
Partners' capital 10,565,299 11,048,629
----------------- -----------------
$ 11,400,102 $ 12,242,594
================= =================
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2003 2002 2001
---------------- --------------- ----------------
Revenues:
Rental income from operating leases $ 977,171 $ 1,035,106 $ 1,118,018
Contingent rental income 92,737 89,048 72,771
Lease termination income -- -- 13,112
Interest and other income 3,677 17,649 41,240
--------------- ---------------- ---------------
1,073,585 1,141,803 1,245,141
---------------- --------------- ----------------
Expenses:
General operating and administrative 182,135 211,181 210,493
Property related 17,786 24,273 18,100
State and other taxes 9,550 15,666 18,223
Depreciation and amortization 188,064 181,855 201,899
---------------- --------------- ----------------
397,535 432,975 448,715
---------------- --------------- ----------------
Income before gain on sale of assets and equity in
earnings of unconsolidated joint ventures 676,050 708,828 796,426
Gain on sale of assets -- 133,603 204,179
Equity in earnings of unconsolidated joint ventures 303,140 253,111 441,969
---------------- --------------- ----------------
Income from continuing operations 979,190 1,095,542 1,442,574
---------------- --------------- ----------------
Discontinued operations
Loss from discontinued operations -- (391,529 ) (188,828 )
Loss on disposal of discontinued operations -- (25,967 ) --
---------------- --------------- ----------------
-- (417,496 ) (188,828 )
---------------- --------------- ----------------
Net income $ 979,190 $ 678,046 $ 1,253,746
================ =============== ================
Income (loss) per limited partner unit
Continuing operations $ 19.58 $ 21.91 $ 28.85
Discontinued operations -- (8.35 ) (3.78 )
---------------- --------------- ----------------
$ 19.58 $ 13.56 $ 25.07
================ =============== ================
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, 2003, 2002, and 2001
General Partners Limited Partners
------------------------------------- -----------------------------------------------------
Accumulated Accumulated
Contributions Earnings Contributions Distributions Earnings
------------------ ---------------- ----------------- ---------------- -------------
Balance, December 31, 2000 $ 162,000 $ 243,788 $ 23,907,878 $ (33,732,194 ) $ 27,263,746
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
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
Distributions to limited
partners ($29.25 per
limited partner unit) -- -- -- (1,462,520) --
Net income -- -- -- -- 979,190
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2003 $ 162,000 $ 243,788 $ 22,631,473 $ (39,956,868) $ 30,174,728
================== ================ ================= ================ ==============
See accompanying notes to financial statements.
Syndication
Costs Total
-------------- --------------
$ (2,689,822 ) $15,155,396
-- (2,913,650 )
-- 1,253,746
-------------- --------------
(2,689,822 ) 13,495,492
-- (3,124,909 )
-- 678,046
-------------- --------------
(2,689,822 ) 11,048,629
-- (1,462,520)
-- 979,190
-------------- --------------
$ (2,689,822) $10,565,299
============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
---------------- ---------------- ---------------
Cash flows from operating activities:
Net income $ 979,190 $ 678,046 $ 1,253,746
---------------- ---------------- ---------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 187,548 207,815 263,950
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 )
Equity in earnings of joint ventures, net of
distributions 100,166 153,871 29,154
Decrease (increase) in receivables 5,313 (30,372 ) 28,626
Decrease in due from related parties -- 1,575 6,935
Decrease (increase) in accrued rental income (2,850 ) (3,896 ) 4,283
Decrease (increase) in other assets (8 ) (3,968 ) 526
Increase (decrease) in accounts payable and
accrued expenses and real estate taxes 13,394 (12,369 ) (12,938 )
payable Increase (decrease) in due to
related parties (3,288 ) 8,569 361
Increase in rents paid in advance and deposits 5,732 33,801 24,941
---------------- ---------------- ---------------
Total adjustments 306,523 655,981 418,020
---------------- ---------------- ---------------
Net cash provided by operating activities 1,285,713 1,334,027 1,671,766
---------------- ---------------- ---------------
Cash flows from investing activities:
Proceeds from sale of real estate properties -- 1,786,443 548,874
Insurance proceeds for casualty loss on building -- 227,579 --
Liquidating distribution from joint venture 278,926 -- 830,263
Net (increase) decrease in certificate of deposit 1,341 -- (60,038 )
---------------- ---------------- ---------------
Net cash provided by investing activities 280,267 2,014,022 1,319,099
---------------- ---------------- ---------------
Cash flows from financing activities:
Proceeds from loan from corporate general partner -- -- 75,000
Repayment of loan from corporate general partner -- -- (75,000 )
Distributions to limited partners (1,837,520 ) (2,714,025 ) (2,923,482 )
---------------- ---------------- ---------------
Net cash used in financing activities (1,837,520 ) (2,714,025 ) (2,923,482 )
---------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents (271,540 ) 634,024 67,383
Cash and cash equivalents at beginning of year 1,193,910 559,886 492,503
---------------- ---------------- ---------------
Cash and cash equivalents at end of year $ 922,370 $ 1,193,910 $ 559,886
================ ================ ===============
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
2003 2002 2001
--------------- --------------- --------------
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
=============== =============== ==============
Distributions declared and unpaid at
December 31 $ 459,380 $ 834,380 $ 423,496
=============== =============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
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, 2003, 2002, and 2001, tenants paid
or are expected to pay, directly to real estate taxing authorities
$150,093, $167,500, and $177,800, respectively, in estimated 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.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
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, assets
are adjusted to the fair value.
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 also invested
in Holland Joint Venture and Show Low Joint Venture, prior to its
liquidation in December 2003, 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.
Cash accounts maintained on behalf of the Partnership in demand
deposits at commercial banks 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.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
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.
Reclassification - Certain items in the prior year's financial
statements have been reclassified to conform to 2003 presentation.
These reclassifications had no effect on partner's capital, net income
or cash flows.
Statement of Financial Accounting Standards No. 144 - Effective January
1, 2002, the Partnership adopted Statement of Financial Accounting
Standards No. 144 ("FAS 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 - 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, 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. In December 2003,
the FASB issued FASB Interpretation No. 46R ("FIN 46R"), to clarify
some of the provisions of FIN 46. Under FIN 46R, special effective date
provisions apply to entities that have fully or partially applied FIN
46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests
in structures that are commonly referred to as special-purpose entities
for periods ending after December 15, 2003. Application by public
entities, other than small business issuers, for all other types of
variable interest entities is required in financial statements for
periods ending after March 15, 2004. The Partnership did not fully or
partially apply FIN 46 prior to the issuance of FIN 46R. Also, the
Partnership does not have interests in structures commonly referred to
as special-purpose entities. Therefore, application of FIN 46R is
required in the Partnership's financial statements for periods ending
after March 15, 2004. 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.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
2. Real Estate Properties with Operating Leases
Real estate properties with operating leases consisted of the following
at December 31:
2003 2002
-------------------- -------------------
Land $ 3,989,212 $ 3,989,212
Buildings 5,435,719 5,435,719
-------------------- -------------------
9,424,931 9,424,931
Less accumulated depreciation (2,859,793) (2,672,245 )
-------------------- -------------------
$ 6,565,138 $ 6,752,686
==================== ===================
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, 2003:
2004 $ 849,162
2005 779,522
2006 774,468
2007 550,369
2008 279,451
Thereafter 1,002,343
-----------------
$ 4,235,315
=================
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
3. Investment in Joint Ventures
The Partnership has a 50% and 49% interest in the profits and losses of
Kirkman Road Joint Venture and Holland Joint Venture, respectively. The
remaining interest in the Holland Joint Venture is held by affiliates
of the general partners. The Partnership also has a 33.87%, 57.91%,
47%, 37.01%, 39.39%, and a 13.38% interest in properties in Arvada,
Colorado; Mesa, Arizona; Smithfield, North Carolina; Vancouver,
Washington; Overland Park, Kansas; and 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.
In January 2002, Houlihan's Restaurant, Inc., which leased the property
owned by Show Low Joint Venture, filed for bankruptcy and rejected the
lease relating to this property. Based on a pending contract to sell
the property, the joint venture, in which the Partnership owned a 64%
interest, recorded a provision for write-down of assets of
approximately $172,200 during the year ended December 31, 2002. The
joint venture had recorded a provision for write-down of assets in a
previous year relating to this property. The contract for the sale of
the property was subsequently terminated. In September 2003, Show Low
Joint Venture sold the property to a third party and recorded a loss on
disposal of discontinued operations of approximately $29,500. In
December 2003, the Partnership and the joint venture partner dissolved
the joint venture and the Partnership received approximately $278,900
representing its pro rata share of the joint venture's liquidating
distribution. The financial results for this property are reflected as
Discontinued Operations in the condensed financial information
presented below.
In December 2003, Holland Joint Venture, in which the Partnership owns
a 49% interest, entered into negotiations with a third party to sell
the property in Holland, Michigan. As a result, the joint venture
reclassified the assets relating to this property from land and
building on operating leases to real estate held for sale. The property
was recorded at the lower of its carrying amount or fair value less
cost to sell. In addition, the joint venture stopped recording
depreciation upon identifying the property as held for sale. The
financial results for this property are reflected as Discontinued
Operations in the condensed financial information presented below.
Kirkman Road Joint Venture, Holland Joint Venture, and the Partnership
and affiliates, as tenants-in-common in six separate tenancy-in-common
arrangements, each own one property.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
3. Investment in Joint Ventures - Continued
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, 2003 December 31, 2002
-------------------- ------------------
Real estate properties with operating
leases, net $ 6,024,001 $ 6,161,834
Net investment in direct financing
leases 2,151,112 2,172,748
Real estate held for sale 768,120 1,357,154
Cash 115,927 28,744
Accrued rental income 403,513 366,596
Other assets -- 194
Liabilities 66,581 20,985
Partners' capital 9,396,092 10,066,285
Years ended December 31,
2003 2002 2001
---------------- -------------- ----------------
Rental revenues $ 1,023,675 $ 1,028,424 $ 953,061
Expenses (149,093 ) (151,187 ) (175,230 )
---------------- -------------- ----------------
Income from continuing operations 874,582 877,237 777,831
---------------- -------------- ----------------
Discontinued operations:
Revenues 120,838 127,108 205,122
Expenses (55,329 ) (55,183 ) (42,916 )
Provision for write-down of assets (55,500 ) (172,165 ) (56,398 )
Loss on disposal of discontinued
operations (29,509 ) -- --
---------------- -------------- ----------------
(19,500 ) (100,240 ) 105,808
---------------- -------------- ----------------
Net income $ 855,082 $ 776,997 $ 883,639
================ ============== ================
The Partnership recognized income totaling $303,140, $253,111, and
$441,969, for the years ended December 31, 2003, 2002, and 2001,
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
Years Ended December 31, 2003, 2002, and 2001
4. Discontinued Operations
During the year ended December 31, 2001, the building on the Casper,
Wyoming property was partially destroyed by fire and subsequently
demolished. In connection with the destruction of the building by the
fire during the year ended December 31, 2001, the Partnership recorded
a provision for write-down of assets of $78,015, which represented the
loss incurred by the Partnership in excess of anticipated insurance
proceeds. The undepreciated cost of the building of $216,817 was
removed from the accounts and the anticipated insurance proceeds of
$138,802 were included in accounts receivable. The Partnership
contested the settlement of the insurance claim, and in June 2002,
received an additional $88,777 in insurance proceeds, which the
Partnership recorded as an adjustment to the loss on disposal of the
property. In 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, in 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 the Property to an unrelated third party 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.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
4. Discontinued Operations - Continued
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.
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,
2003 2002 2001
---------------- ---------------- ----------------
Rental revenues $ -- $ 79,103 $ 177,623
Other income -- 4,031 --
Expenses -- (65,128 ) (142,901 )
Provision for write-down of assets -- (409,535 ) (223,550 )
---------------- ---------------- ----------------
Loss from discontinued operations $ -- $ (391,529 ) $ (188,828 )
================ ================ ================
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% 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% 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% to the limited partners
and five percent to the general partners.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
5. Allocations and Distributions - Continued
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 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% 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, 2003, 2002 and 2001.
During the years ended December 31, 2003, 2002, and 2001, the
Partnership declared distributions to the limited partners of
$1,462,520, $3,124,909, and $2,913,650, respectively. Distributions for
the year ended December 31, 2003, 2002, and 2001, included $125,000,
$1,600,000, and $1,200,000, respectively in special 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, $125,000, $866,124, and $657,471 were applied toward the
limited partners' 10% Preferred Return and the balances of $0,
$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 sales 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.
No distributions have been made to the general partners to date.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
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:
2003 2002 2001
-------------- -------------- ---------------
Net income for financial reporting purposes $ 979,190 $ 678,046 $ 1,253,746
Effect of timing differences relating to
depreciation 16,180 (8,035 ) 11,312
Effect of timing differences relating to
gains/losses on real estate property sales 1,713 (738,824 ) (6,653 )
Effect of timing differences relating to equity
in earnings of unconsolidated joint 77,732 79,851 32,953
ventures
Effect of timing differences relating to
allowance for doubtful accounts 28,888 (23,640 ) (122,653 )
Accrued rental income (2,850 ) (3,896 ) 4,283
Rents paid in advance (24,940 ) 19,203 (9,950 )
Provision for write-down of assets -- 498,312 223,550
Provision for (deduction of) contamination
expenses -- (7,329 ) --
Other (202 ) -- --
-------------- -------------- ---------------
Net income for federal income tax purposes $ 1,075,711 $ 493,688 $ 1,386,588
============== ============== ===============
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 Restaurant
Properties, Inc. ("CNL-RP") (formerly CNL American Properties Fund,
Inc.), 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. ("the Advisor"). The Advisor is a wholly owned
subsidiary of CNL Restaurant Properties, Inc. ("CNL-RP"). The
individual general partners are stockholders and directors of CNL-RP.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
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 the lessor of 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, cumulative 10% Preferred Return. Due to the
fact that management 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, 2003, 2002, and 2001.
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. However, if
the net sales proceeds are reinvested in a replacement property, no
such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are
distributed. 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 year ended December 31, 2003, the Partnership incurred no deferred,
subordinated, real estate disposition fees as a result of the sales of
properties. During the years ended December 31, 2002 and 2001, the
Partnership incurred $55,329 and $16,620 in deferred, subordinated,
real estate disposition fees as a result of the sales of properties.
During the years ended December 31, 2003, 2002, and 2001, the
Partnership's affiliates provided accounting and administrative
services. The Partnership incurred $112,185, $152,193, and $140,936,
for the years ended December 31, 2003, 2002, and 2001, respectively,
for such services.
The due to related parties consisted of the following at December 31:
2003 2002
--------------- ---------------
Expenditures incurred on behalf
of the Partnership, including
accounting and administrative
services $ 9,093 $ 12,381
Deferred, subordinated real
estate disposition fee 188,155 188,155
-------------- ---------------
$ 197,248 $ 200,536
=============== ===============
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
8. Concentration of Credit Risk
For the year ended December 31, 2003, no tenant represented more than
ten percent of the Partnership's 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). For the years ended December 31, 2002 and 2001, rental
revenues from Golden Corral Corporation were $209,247 and $397,632,
respectively, representing more than ten percent of the Partnership's
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).
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:
2003 2002 2001
------------- --------------- -------------
Wendy's Old Fashioned
Hamburger Restaurants $ 233,122 $ 227,046 $ 219,778
Pizza Hut 162,203 N/A N/A
Golden Corral Buffet and Grill N/A 238,441 397,632
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 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 year ended December 31, 2003, phase two of the clean up work
commenced.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
10. Selected Quarterly Financial Data
The following table presents selected unaudited quarterly financial
data for each full quarter during the years ended December 31, 2003 and
2002.
2003 Quarter First Second Third Fourth Year
------------------------------- ------------ ----------- ----------- ----------- ------------
Continuing Operations (1):
Revenues $251,603 $262,422 $268,053 $291,507 $ 1,073,585
Equity in earnings of
unconsolidated joint
ventures 88,556 52,157 71,184 91,243 303,140
Income from continuing
operations 221,794 221,468 245,581 290,347 979,190
Discontinued Operations (1):
Revenues -- -- -- -- --
Income from discontinued
operations -- -- -- -- --
Net Income 221,794 221,468 245,581 290,347 979,190
Income per limited partner unit:
Continuing operations $ 4.44 $ 4.43 $ 4.91 $ 5.80 $ 19.58
Discontinued operations -- -- -- -- --
------------ ----------- ----------- ----------- ------------
Total $ 4.44 $ 4.43 $ 4.91 $ 5.80 $ 19.58
============ =========== =========== =========== ============
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
unconsolidated 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 and
loss on disposal of
discontinued operations 27,447 (252,832 ) (182,716 ) (9,395 ) (417,496)
Net income 271,540 121,718 86,442 198,346 678,046
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
============ =========== =========== =========== ============
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
10. Selected Quarterly Financial Data - Continued
(1) Certain items in the quarterly financial data have been reclassified to
conform to the 2003 presentation. This reclassification had no effect
on net income. 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. The results of operations
relating to properties that were either identified for sale and
disposed of subsequent to January 1, 2002 or were classified as held
for sale as of December 31, 2003 are reported as discontinued
operations for all periods presented.
(2) In October 2002, Show Low Joint Venture, in which the Partnership owned
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.
Item 9A. 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 Annual Report on Form 10-K 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 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-RP, CCM, CNL Financial Group, Inc. and their
affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 57. 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 CNL-RP, a public, unlisted real
estate investment trust since 1994. Mr. Seneff served as Chief Executive Officer
of CNL-RP from 1994 through August 1999 and as Co-Chief Executive Officer from
December 2000 through September 2003. Mr. Seneff served as Chairman of the Board
and Chief Executive Officer of CNL Fund Advisors, Inc., formerly the
Partnership's advisor, from its inception in 1990 until it merged with a
wholly-owned subsidiary of CNL-RP in September 1999, and in June 2000, was
re-elected to those positions of CNL Fund Advisors, Inc. CNL Fund Advisors,
Inc., formerly CNL Institutional Advisors, Inc., is a registered investment
advisor. Mr. Seneff is a principal stockholder of CNL Holdings, Inc., the parent
company of CNL Financial 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 1973. CNL Financial Group, Inc. is and 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 and Chairman of the Board of CNL
Hospitality Properties, Inc., a public, unlisted real estate investment trust;
and served as Chief Executive Officer of CNL Hospitality Properties, Inc. from
its inception in 1997 until 2003 and served as Co-Chief Executive Officer from
February 2003 until May 1, 2003. Mr. Seneff has served as Chairman of the Board
of CNL Hospitality Corp., the advisor to CNL Hospitality Properties, Inc., since
its inception in 1997. Mr. Seneff also served as Chief Executive Officer from
its inception in 1997 through February 2003, and currently serves as Co-Chief
Executive Officer of CNL Hospitality Corp. Mr. Seneff has served as Director and
Chairman of the Board of CNL Retirement Corp. since 1997 and served as Chief
Executive Officer of CNL Retirement Corp. from 1997 through 2003. CNL Retirement
Corp. is the advisor to CNL Retirement Properties, Inc., a public, unlisted real
estate investment trust. Mr. Seneff has also served as Director and Chairman of
the Board of Commercial Net Lease Realty, Inc., a public real estate investment
trust that is listed on the New York Stock Exchange, since 1992 and served as
Chief Executive Officer of Commercial Net Lease Realty, Inc. from 1992 through
February 2004. Mr. Seneff Has served as a Director, Chairman of the Board, and
Chief Executive Officer of CNL Securities Corp. since its formation in 1979; CNL
Investment Company since 1990; and CNL Institutional Advisors, Inc., a
registered investment advisor for pension plans, since 1990. Mr. Seneff has
served as Chairman of the Board and Chief Executive Officer of CNL Commercial
Finance, Inc. since 2000. Mr. Seneff also serves as Chairman of the Board of
CNLBank, 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 the
Florida state retirement plan. Mr. Seneff received his degree in Business
Administration from Florida State University in 1968.
Robert A. Bourne, age 56. 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 has
served as a Director and Vice Chairman of the Board of CNL-RP since 1994. Mr.
Bourne also served as President of CNL-RP from 1994 through February 1999 and
served as Treasurer from February 1999 through August 1999 and from May 1994
through December 1994. Mr. Bourne served in various executive positions with CNL
Fund Advisors, Inc. prior to its merger with a wholly-owned subsidiary of CNL-RP
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. Mr. Bourne serves as Director, Vice Chairman of the Board
and Treasurer and from 1997 until June 2002 served as President of CNL
Hospitality Properties, Inc. and as Director, President and Treasurer of CNL
Hospitality Corp. Mr. Bourne also serves as Director and Treasurer of CNL
Retirement Properties, Inc. and as Director and Treasurer of CNL Retirement
Corp. Mr. Bourne serves as a Director of CNLBank. Mr. Bourne has also 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. Mr. Bourne 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. 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 48. Mr. McWilliams has served as President of
CNL-RP since May 2001 and as Chief Executive Officer of CNL-RP since September
2003. Mr. McWilliams served as Co-Chief Executive Officer of CNL-RP from
December 2000 through September 2003 and served as Chief Executive Officer from
September 1999 through December 2000. Mr. McWilliams also served as President
and Chief Executive Officer of CNL Franchise Network Corp., a wholly owned
subsidiary of CNL-RP since August 2002 and served as President of CNL-RP from
February 1999 until September 1999 and as Executive Vice President of CNL-RP
from 1997 through February 1999. Mr. McWillimas served as an Executive Vice
President of CNL Financial Group, Inc. from the time he joined the company in
April 1997 until September 1999. 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 CNL-RP 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 40. Mr. Shackelford was promoted to
Executive Vice President and Chief Operating Officer of CNL-RP in September
2003. Mr. Shackelford has also served as Chief Financial Officer since January
1997. He served as Senior Vice President of CNL-RP from January 1997 through
July 2000, when he was promoted to Executive Vice President. Mr. Shackelford has
also served as Secretary and Treasurer of CNL-RP 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.
Thomas Arasi, age 46. Mr. Arasi has served as President of CCM since it
was formed in July 2003 to provide strategic advisory services to the General
Partners. He has served in various consulting capacities to CNL Hospitality Corp
and other CNL affiliates since January 2003. Since November 2001 he has been an
independent consultant working for a variety of operating and investment
companies in the hospitality industry. Until October 2001, Mr. Arasi was
President & Chief Executive Officer, and a member of the Board of Directors of
Lodgian, Inc., a New York Stock Exchange traded company, one of the largest
independent hotel owner/operators in North America, with hotel properties under
most brand names including Marriott, Courtyard by Marriott, Fairfield Inn by
Marriott, Crowne Plaza, Holiday Inn, Hilton, and Radisson. From June 1997
through November 2000, Mr. Arasi was a member of the Management Committee and
held several top operating positions with Bass Hotels & Resorts, one of the
leading international owners, operators and franchisors of hotels, most recently
serving as President, Bass Hotels & Resort--The Americas. Mr. Arasi was formerly
President of Tishman Hotel Corporation, Vice President of Salomon Brothers,
Inc., in New York, Tokyo and Los Angeles and held positions with Sheraton,
Westin and HVS International. Mr. Arasi graduated from Cornell University in
January 1981, where he received a Bachelor's degree in Hotel and Restaurant
Administration.
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 2003.
Code of Business Conduct
The Partnership does not have employees and, accordingly, has not
adopted a code of business conduct applicable exclusively to the Partnership.
However, employees of the General Partners or their affiliates, including the
individual General Partners, are bound by the Code of Business Conduct adopted
November 11, 2003 by CNL Holdings, Inc. Separately, the employees of the Advisor
are bound by the similar Code of Business Conduct adopted by CNL Restaurant
Properties, Inc. Each of these codes of business conduct will be made available
to any person who writes the Partnership requesting a copy.
Audit Committee Financial Expert
Due to its organization as a limited partnership, the Partnership does
not have an audit committee that is responsible for supervising the
Partnership's relationship with its independent auditors. For the Partnership,
this role is performed by the General Partners. Based on his previous service as
the principal financial officer of companies with businesses similar to that of
the Partnership, Robert A. Bourne, one of the General Partners, has the
requisite experience to be considered an "audit committee financial expert" as
defined in the rules under the Securities Exchange Act of 1934, if the
Partnership had an audit committee. As a General Partner, Mr. Bourne is not
independent of the Partnership.
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 and
Related Stockholder Matters
As of March 12, 2004, 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 12, 2004, 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, 2003, 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, 2003
- ---------------------------------- -------------------------------------- ------------------------------
Reimbursement to affiliates for Operating expenses are reimbursed at Accounting and
operating expenses the lower of cost or 90% of the administra-tive services: $112,185
prevailing rate at which comparable
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, 2003
- --------------------------------- -------------------------------------- ------------------------------
Deferred, subordinated real A deferred, subordinated real estate $-0-
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, 2003
- --------------------------------- -------------------------------------- ------------------------------
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. Principal Accountant Fees and Services
The following table outlines the only fees paid or accrued by the
Partnership for the audit and other services provided by the Partnership's
independent certified public accountants, PricewaterhouseCoopers LLP, for the
years ended December 31:
2003 2002
--------------------- ---------------------
Audit Fees (1) $ 8,442 $ 8,200
Tax Fees (2) 5,115 4,444
--------------------- ---------------------
Total $ 13,557 $ 12,644
===================== =====================
(1) Audit services of PricewaterhouseCoopers LLP for 2003 and 2002
consisted of the examination of the financial statements of the
Partnership and quarterly review of financial statements.
(2) Tax Fees relates to tax consulting and compliance services.
Each of the non-audit services described above was approved by the
General Partners. Due to its organization as a limited partnership, the
Partnership does not have an audit committee.
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, 2003 and 2002
Statements of Income for the years ended December 31, 2003,
2002, and 2001
Statements of Partners' Capital for the years ended December
31, 2003, 2002, and 2001
Statements of Cash Flows for the years ended December 31,
2003, 2002, and 2001
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 2003, 2002, and 2001
Schedule III - Real Estate and Accumulated Depreciation at
December 31, 2003
Notes to Schedule III - Real Estate and Accumulated
Depreciation at December 31, 2003
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.)
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) The Registrant filed no reports on Form 8-K during the period
from October 1, 2003 through December 31, 2003.
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, 2004.
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, 2004
- ------------------------------------
Robert A. Bourne (Principal Financial and Accounting
Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director March 24, 2004
- ------------------------------------
James M. Seneff, Jr. (Principal Executive Officer)
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2003, 2002, and 2001
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
- ---------- ----------------- -------------- --------------- ---------------- ------------- ------------ ------------
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) $ -- $ --
============== =============== ================ ============= ============ ============
2003 Allowance for
doubtful
accounts (a) $ -- $ -- $ 29,888 (b) $ -- $ 1,000 $ 28,888
============== =============== ================ ============= ============ ============
(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, 2003
Costs Capitalized
Subsequent to Net Cost Basis at Which
Initial Cost Acquisition Carried at Close of Period (c)
------------------------- -----------------------------------------------------------
Encum- Buildings and Improve- Carrying Buildings and
brances Land Improvements ments Costs Land Improvements Total
---------- -------- -------------- -------- -------- ------------ --------------- -------
Properties the Partnership
has Invested in:
Checkers Drive-In Restaurants:
Fayetteville, Georgia - $ 338,735 - - - $ 338,735 - $ 338,735
Atlanta, Georgia - 317,128 - - - 317,128 - 317,128
Golden Corral
Buffet and Grill
Nederland, Texas - 327,473 520,701 - - 327,473 520,701 848,174
Hableanos Mexican Grill Restaurant:
Hueytown, Alabama - 258,084 513,853 - - 258,084 513,853 771,937
Jack in the Box Restaurant:
Lubbock, Texas - 229,198 408,702 - - 229,198 408,702 637,900
KFC Restaurant: -
Eagan, Minnesota - 202,084 370,247 31,976 - 202,084 402,223 604,307
Lonestar Steakhouse &
Saloon Restaurant:
Sterling Heights, Michigan (e) - 430,281 - 648,736 - 430,281 648,736 1,079,017
Pizza Hut Restaurants:
Clayton, New Mexico - 54,093 200,141 - - 54,093 200,141 254,234
Santa Rosa, New Mexico - 75,963 168,204 - - 75,963 168,204 244,167
Childress, Texas - 71,512 145,191 - - 71,512 145,191 216,703
Coleman, Texas - 70,208 141,004 - - 70,208 141,004 211,212
Ponderosa Steakhouse Restaurant:
Scottsburg, Indiana - 208,781 - 518,884 - 208,781 518,884 727,665
Popeyes Famous Fried
Chicken Restaurants:
Ocala, Florida - 218,677 274,992 - - 218,677 274,992 493,669
Wendy's Old Fashioned
Hamburger Restaurants:
Gainesville, Texas - 166,302 449,914 - - 166,302 449,914 616,216
Vail, Colorado - 782,609 - 550,346 - 782,609 550,346 1,332,955
Other:
Oxford, Alabama (f) - 152,567 355,990 - - 152,567 355,990 508,557
Lombard, Illinois (g) - 85,517 96,205 40,633 - 85,517 136,838 222,355
---------- ------------ ----------- ------- ------------ ------------ ------------
$3,989,212 $3,645,144 $1,790,575 - $3,989,212 $5,435,719 $9,424,931
========== ============ =========== ======= ============ ============ ============
Life on Which
Depreciation in
Date Latest Income
Accumulated of Con- Date Statement is
Depreciation structionAcquired Computed
- -------------------------------- ------------
(d) - 12/94 (d)
(d) - 12/94 (d)
284,932 1987 08/87 (b)
284,042 1987 06/87 (b)
142,128 1993 07/93 (b)
217,868 1987 10/87 (b)
342,388 1988 08/87 (b)
109,523 1986 08/87 (b)
92,042 1986 08/87 (b)
79,448 1974 08/87 (b)
75,597 1977 12/87 (b)
273,852 1988 10/87 (b)
155,066 1987 02/87 (b)
247,455 1986 07/87 (b)
301,165 1987 08/87 (b)
188,373 1987 02/88 (b)
65,914 1973 10/87 (b)
- ------------
$2,859,793
============
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
(a) Transactions in real estate and accumulated depreciation are summarized
below. The balances in 2003, 2002, and 2001 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, 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
Depreciation expense -- 187,548
---------------- -----------------
Balance, December 31, 2003 $ 9,424,931 $ 2,859,793
================ =================
(b) Depreciation expense is computed for buildings and improvements based
upon estimated lives of 30 years.
(c) As of December 31, 2003, the aggregate cost of the Properties wholly
owned by the Partnership for federal income tax purposes was
$9,378,528. 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.
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.)
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