FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended March 31, 2004
--------------------------------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the transition period from ______________________ to ______________________
Commission file number
0-16824
---------------------------------------
CNL Income Fund II, Ltd.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2733859
- --------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
- ------------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 540-2000
--------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes___ No X
CONTENTS
Page
Part I.
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 8
Item 4. Controls and Procedures 9
Part II.
Other Information 10-11
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
March 31, December 31,
2004 2003
------------------- -------------------
ASSETS
Real estate properties with operating leases, net $ 6,519,697 $ 6,565,138
Investment in joint ventures 3,594,544 3,621,892
Cash and cash equivalents 781,920 922,370
Certificate of deposit 60,629 60,483
Receivables, less allowance for doubtful
accounts of $11,314 and $28,888, respectively 11,654 38,192
Accrued rental income 185,198 185,490
Other assets 9,804 6,537
------------------- -------------------
$ 11,163,446 $ 11,400,102
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 88,235 $ 71,534
Real estate taxes payable 15,790 21,680
Distributions payable 334,380 459,380
Due to related parties 209,426 197,248
Rents paid in advance and deposits 72,349 84,961
------------------- -------------------
Total liabilities 720,180 834,803
Partners' capital 10,443,266 10,565,299
------------------- -------------------
$ 11,163,446 $ 11,400,102
=================== ===================
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended
March 31,
2004 2003
--------------- ---------------
Revenues:
Rental income from operating leases $ 239,823 $ 248,484
Contingent rental income 9,062 2,256
Interest and other income 672 863
--------------- ---------------
249,557 251,603
--------------- ---------------
Expenses:
General operating and administrative 66,116 57,818
Property related 1,094 3,030
State and other taxes 17,634 6,163
Depreciation and amortization 45,879 51,354
--------------- ---------------
130,723 118,365
--------------- ---------------
Income before equity in earnings of
unconsolidated joint ventures 118,834 133,238
Equity in earnings of unconsolidated
joint ventures 93,513 88,556
--------------- ---------------
Net income $ 212,347 $ 221,794
=============== ===============
Income per limited partner unit $ 4.25 $ 4.44
=============== ===============
Weighted average number of limited partner
units outstanding 50,000 50,000
=============== ===============
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Quarter Ended Year Ended
March 31, December 31,
2004 2003
----------------- ------------------
General partners:
Beginning balance $ 405,788 $ 405,788
Net income -- --
----------------- ------------------
$ 405,788 $ 405,788
----------------- ------------------
Limited partners:
Beginning balance 10,159,511 10,642,841
Net income 212,347 979,190
Distributions ($6.69 and $29.25 per
limited partner unit, respectively) (334,380) (1,462,520)
----------------- ------------------
10,037,478 10,159,511
----------------- ------------------
Total partners' capital $ 10,443,266 $ 10,565,299
================= ==================
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Quarter Ended
March 31,
2004 2003
--------------- --------------
Net cash provided by operating activities $ 318,930 $ 351,300
--------------- --------------
Cash flows from financing activities:
Distributions to limited partners (459,380) (834,380)
--------------- --------------
Net cash used in financing activities (459,380) (834,380)
--------------- --------------
Net decrease in cash and cash equivalents (140,450) (483,080)
Cash and cash equivalents at beginning of quarter 922,370 1,193,910
--------------- --------------
Cash and cash equivalents at end of quarter $ 781,920 $ 710,830
=============== ==============
Supplemental schedule of non-cash financing activities:
Distributions declared and unpaid at end of quarter $ 334,380 $ 334,380
=============== ==============
See accompanying notes to condensed financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 2004 and 2003
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of the general partners, necessary for a fair
statement of the results for the interim periods presented. Operating
results for the quarter ended March 31, 2004, may not be indicative of
the results that may be expected for the year ending December 31, 2004.
Amounts as of December 31, 2003, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund II, Ltd. (the "Partnership") for the year ended December
31, 2003.
In December 2003, the Financial Accounting Standards Board issued a
revision to FASB Interpretation No. 46 (originally issued in January
2003) ("FIN 46R"), "Consolidation of Variable Interest Entities"
requiring existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries. Application of FIN 46R is
required in financial statements of public entities that have interests
in variable interest entities for periods ending after March 15, 2004.
The Partnership has adopted FIN 46R as of March 31, 2004. The
Partnership was not the primary beneficiary of a variable interest
entity at the time of adoption of FIN 46R, therefore the adoption had
no effect on the balance sheet, partner's capital or net income.
2. Concentration of Credit Risk
The following schedule presents total rental revenues from individual
lessees, each representing more than ten percent of total 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 quarters ended
March 31:
2004 2003
------------ ---------------
Wend Vail Partnership, Ltd. $ 37,500 $ 37,500
In addition, the following schedule presents total rental revenues from
individual restaurant chains, each representing more than ten percent
of rental revenues (including the Partnership's share of rental
revenues from the joint ventures and the properties held as
tenants-in-common with affiliates of the general partners), for each of
the quarters ended March 31:
2004 2003
------------- ---------------
Wendy's Old Fashioned
Hamburger Restaurants $ 53,298 $ 53,298
Golden Corral
Buffet and Grill N/A 39,835
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 2004 and 2003
2. Concentration of Credit Risk - Continued
The information denoted by N/A indicates that for each period
presented, the chain did not represent more than ten percent of the
Partnership's total rental revenues.
Although the Partnership's properties have some geographical diversity
in the United States and the Partnership's lessees operate a variety of
restaurant concepts, default by any of these lessees or restaurant
chains 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CNL Income Fund II, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on November 13, 1986 to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurant properties, as well as land upon which restaurants were to
be constructed, which are leased primarily to operators of national and regional
fast-food restaurant chains (collectively, the "Properties"). The leases
generally are triple-net leases, with the lessees responsible for all repairs
and maintenance, property taxes, insurance and utilities. The Partnership owned
17 Properties directly as of March 31, 2004 and 2003. The Partnership also owned
eight and nine Properties indirectly through joint venture or tenancy in common
arrangements as of March 31, 2004 and 2003, respectively.
Capital Resources
Net cash provided by operating activities was $318,930 and $351,300 for
the quarters ended March 31, 2004 and 2003, respectively.
Cash and cash equivalents of decreased to $781,920 at March 31, 2004,
from $922,370 at December 31, 2003. The decrease in cash and cash equivalents at
March 31, 2004 as compared to December 31, 2003 was primarily a result of paying
a special distribution to the limited partners during the quarter ended March
31, 2004, which was declared at December 31, 2003. The special distribution was
comprised of the liquidating proceeds from the dissolution of a joint venture.
At March 31, 2004, these funds were held in a demand deposit account at a
commercial bank. The funds remaining at March 31, 2004, 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 generate net cash flow in
excess of operating expenses.
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of operating expenses of the Partnership, to the extent that
the general partners determine that such funds are available for distribution.
Based on current and anticipated future cash from operations, the Partnership
declared distributions to limited partners of $334,380 for the quarters ended
March 31, 2004 and 2003. This represents distributions of $6.69 per unit for
each applicable quarter. As a result of the sales of Properties in prior years,
the Partnership's total revenues have declined and are expected to remain
reduced in subsequent periods, while the majority of the Partnership's operating
expenses have remained and are expected to remain fixed. No distributions were
made to the general partners for the quarters ended March 31, 2004 and 2003. No
amounts distributed to the limited partners for the quarters ended March 31,
2004 and 2003 are required to be or have been treated by the Partnership as a
return of capital for purposes of calculating the limited partners' return on
their adjusted capital contributions. The Partnership intends to continue to
make distributions of cash available for distribution to the limited partners on
a quarterly basis.
Total liabilities, including distributions payable, decreased to
$720,180 at March 31, 2004 from $834,803 at December 31, 2003, primarily as a
result of the Partnership paying a special distribution to the limited partners
that had been declared at December 31, 2003. The general partners believe that
the Partnership has sufficient cash on hand to meet its current working capital
needs.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Rental revenues from continuing operations were $239,823 for the
quarter ended March 31, 2004 as compared to $248,484 in the same period in 2003.
The decrease in rental revenues from continuing operations during March 31,
2004, is primarily due to the tenant of the Property in Nederland, Texas
vacating the premises and ceasing all restaurant operations during January 2004.
The Partnership is currently seeking a new tenant for this Property. The lost
revenues resulting from the vacant Property will continue to have an adverse
effect on the results of operations of the Partnership until the Partnership is
able to re-lease the Property.
During the quarters ended March 31, 2004 and 2003, the Partnership
earned $9,062 and $2,256, respectively, in contingent rental revenues.
During the quarters ended March 31, 2004 and 2003, the Partnership
earned $93,513 and $88,556, respectively, attributable to net income earned by
unconsolidated joint ventures. The increase in net income earned by
unconsolidated joint ventures was primarily due to the September 2003 sale of
the vacant Property owned by Show Low Joint Venture, in which the Partnership
owned a 64% interest.
Operating expenses, including depreciation and amortization, were
$130,723 and $118,365 for the quarters ended March 31, 2004 and 2003,
respectively. The increase in operating expenses during the quarter ended March
31, 2004, as compared to the same period in 2003, was primarily due to the
Partnership incurring additional general operating and administrative expenses,
including legal fees, and an increase in the amount of state tax expense
relating to several states in which the Partnership conducts business.
The general partners continuously evaluate strategic alternatives for
the Partnership, including alternatives to provide liquidity to the limited
partners.
In December 2003, the Financial Accounting Standards Board issued a
revision to FASB Interpretation No. 46 (originally issued in January 2003) ("FIN
46R"), "Consolidation of Variable Interest Entities" requiring existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries. Application of FIN 46R is required in financial statements of
public entities that have interests in variable interest entities for periods
ending after March 15, 2004. The Partnership has adopted FIN 46R as of March 31,
2004. The Partnership was not the primary beneficiary of a variable interest
entity at the time of adoption of FIN 46R, therefore the adoption had no effect
on the balance sheet, partner's capital or net income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
The general partners maintain a set of disclosure controls and
procedures designed to ensure that information required to be disclosed in the
Partnership's filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The principal executive
and financial officers of the corporate general partner have evaluated the
Partnership's disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q and have determined that such
disclosure controls and procedures are effective.
There was no change in internal control over financial reporting that
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
-----------------
Item 2. Changes in Securities. Inapplicable.
---------------------
Item 3. Defaults upon Senior Securities. Inapplicable.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
---------------------------------------------------
Item 5. Other Information. Inapplicable.
-----------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to
Registration Statement No. 33-10351 on Form S-11 and
incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as
Exhibit 3.2 to Form 10-K filed with the Securities and
Exchange Commission on April 2, 1993, and incorporated
herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 4.1 to Amendment No. 1 to
Registration Statement No. 33-10351 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as
Exhibit 3.2 to Form 10-K filed with the Securities and
Exchange Commission on April 2, 1993, and incorporated
herein by reference.)
10.1 Property Management Agreement (Included as Exhibit 10.1
to Form 10-K filed with the Securities and Exchange
Commission on April 2, 1993, and incorporated herein by
reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc.
(Included as Exhibit 10.2 to Form 10-K filed with the
Securities and Exchange Commission on March 30, 1995, and
incorporated herein by reference.)
10.3 Assignment of Property Management Agreement from CNL
Income Fund Advisors, Inc. to CNL Fund Advisors, Inc.
(Included as Exhibit 10.3 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996 and
incorporated herein by reference.)
10.4 Assignment of Management Agreement from CNL Fund
Advisors, Inc. to CNL APF Partners, LP. (Included as
Exhibit 10.4 to Form 10-Q filed with the Securities and
Exchange Commission on August 13, 2001, and incorporated
herein be reference.)
10.5 Assignment of Management Agreement from CNL APF Partners,
LP to CNL Restaurants XVIII, Inc. (Included as Exhibit
10.5 to Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2002, and incorporated herein by
reference.)
31.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. (Filed herewith.)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 12 day of May, 2004.
CNL INCOME FUND II, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
-------------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
-------------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit Number
(c) Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to
Registration Statement No. 33-10351 on Form S-11 and
incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as
Exhibit 3.2 to Form 10-K filed with the Securities and
Exchange Commission on April 2, 1993, and incorporated
herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 4.1 to Amendment No. 1 to
Registration Statement No. 33-10351 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as
Exhibit 3.2 to Form 10-K filed with the Securities and
Exchange Commission on April 2, 1993, and incorporated
herein by reference.)
10.1 Property Management Agreement (Included as Exhibit 10.1
to Form 10-K filed with the Securities and Exchange
Commission on April 2, 1993, and incorporated herein by
reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc.
(Included as Exhibit 10.2 to Form 10-K filed with the
Securities and Exchange Commission on March 30, 1995, and
incorporated herein by reference.)
10.3 Assignment of Property Management Agreement from CNL
Income Fund Advisors, Inc. to CNL Fund Advisors, Inc.
(Included as Exhibit 10.3 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996 and
incorporated herein by reference.)
10.4 Assignment of Management Agreement from CNL Fund
Advisors, Inc. to CNL APF Partners, LP. (Included as
Exhibit 10.4 to Form 10-Q filed with the Securities and
Exchange Commission on August 13, 2001, and incorporated
herein be reference.)
10.5 Assignment of Management Agreement from CNL APF Partners,
LP to CNL Restaurants XVIII, Inc. (Included as Exhibit
10.5 to Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2002, and incorporated herein by
reference.)
31.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. (Filed herewith.)
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2