FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended September 30, 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 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 12
Item 4. Controls and Procedures 12
Part II.
Other Information 13-14
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
September 30, December 31,
2004 2003
------------------- -------------------
ASSETS
Real estate properties with operating leases, net $ 5,878,588 $ 6,001,896
Real estate held for sale 511,750 563,242
Investment in joint ventures 3,205,873 3,621,892
Cash and cash equivalents 1,366,488 922,370
Certificate of deposit 60,323 60,483
Receivables, less allowance for doubtful
accounts of $11,314 and $28,888, respectively -- 38,192
Accrued rental income 184,616 185,490
Other assets 7,971 6,537
------------------- -------------------
$ 11,215,609 $ 11,400,102
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 113,159 $ 71,534
Real estate taxes payable 26,028 21,680
Distributions payable 334,380 459,380
Due to related parties 204,144 197,248
Rents paid in advance and deposits 77,877 84,961
------------------- -------------------
Total liabilities 755,588 834,803
Partners' capital 10,460,021 10,565,299
------------------- -------------------
$ 11,215,609 $ 11,400,102
=================== ===================
See accompanying notes to condensed financial statements.
1
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------- ------------ -------------- --------------
Revenues:
Rental income from operating leases $ 231,076 $ 228,839 $ 686,219 $ 682,736
Contingent rental income 19,100 16,986 28,162 30,312
Interest and other income 494 332 1,352 3,343
------------- ------------ -------------- --------------
250,670 246,157 715,733 716,391
------------- ------------ -------------- --------------
Expenses:
General operating and administrative 70,798 42,790 195,335 144,215
Property related 4,006 4,021 7,275 8,726
State and other taxes -- 1,275 18,401 9,550
Depreciation and amortization 42,348 41,232 127,045 123,696
------------- ------------ -------------- --------------
117,152 89,318 348,056 286,187
------------- ------------ -------------- --------------
Income before equity in earnings of
unconsolidated joint ventures 133,518 156,839 367,677 430,204
Equity in earnings of unconsolidated joint
ventures 82,174 71,184 583,155 211,897
------------- ------------ -------------- --------------
Income from continuing operations 215,692 228,023 950,832 642,101
------------- ------------ -------------- --------------
Discontinued operations:
Income (loss) from discontinued operations (5,305) 17,558 (52,970) 46,742
------------- ------------ -------------- --------------
Net income $ 210,387 $ 245,581 $ 897,862 $ 688,843
============= ============ ============== ==============
Income (loss) per limited partner unit:
Continuing operations $ 4.32 $ 4.56 $ 19.02 $ 12.84
Discontinued operations (0.11) 0.35 (1.06) 0.94
------------- ------------ -------------- --------------
$ 4.21 $ 4.91 $ 17.96 $ 13.78
============= ============ ============== ==============
Weighted average number of limited partner
units outstanding 50,000 50,000 50,000 50,000
============= ============ ============== ==============
See accompanying notes to condensed financial statements.
2
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Nine Months Ended Year Ended
September 30, 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 897,862 979,190
Distributions ($20.06 and $29.25 per
limited partner unit, respectively) (1,003,140) (1,462,520)
---------------------- ------------------
10,054,233 10,159,511
---------------------- ------------------
Total partners' capital $ 10,460,021 $ 10,565,299
====================== ==================
See accompanying notes to condensed financial statements.
3
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2004 2003
--------------- --------------
Net cash provided by operating activities $ 901,066 $ 987,085
--------------- --------------
Cash flows from investing activities:
Liquidating distribution from joint venture 671,192 --
--------------- --------------
Net cash provided by investing activities 671,192 --
--------------- --------------
Cash flows from financing activities:
Distributions to limited partners (1,128,140) (1,503,140)
--------------- --------------
Net cash used in financing activities (1,128,140) (1,503,140)
--------------- --------------
Net increase (decrease) in cash and cash equivalents 444,118 (516,055)
Cash and cash equivalents at beginning of period 922,370 1,193,910
--------------- --------------
Cash and cash equivalents at end of period $ 1,366,488 $ 677,855
=============== ==============
Supplemental schedule of non-cash investing and financing activities:
Land under operating lease exchanged for land under
operating lease $ 317,128 $ --
=============== ==============
Distributions declared and unpaid at end of period $ 334,380 $ 334,380
=============== ==============
See accompanying notes to condensed financial statements.
4
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 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 and nine months ended September 30, 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 adopted FIN 46R during the quarter ended 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. Real Estate Properties with Operating Leases
In September 2004, the Partnership entered into a purchase and exchange
agreement whereby the Property in Atlanta, Georgia, consisting of only
land, was exchanged for land in Clearwater, Florida.
3. Investment in Joint Ventures
In April 2004, Holland Joint Venture, in which the Partnership owned a
49% interest, entered into an agreement with a third party to sell its
property in Holland, Michigan. In June 2004, the joint venture sold
this property, which resulted in a gain on disposal of discontinued
operations of approximately $638,900. As a result of the sale of the
property, the joint venture was dissolved and the Partnership received
approximately $671,200 representing its pro-rata share of the
liquidating distribution from the joint venture. The financial results
for this property, along with the property previously owned by Show Low
Joint Venture, are reflected as discontinued operations in the
combined, condensed financial information presented below.
Kirkman Road Joint Venture owns one property. In addition, the
Partnership and affiliates as tenants-in-common in six separate tenancy
in common arrangements each own one property.
5
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2004 and 2003
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:
September 30, December 31,
2004 2003
---------------- ----------------
Real estate properties with operating $ 5,920,627 $ 6,024,001
leases, net
Net investment in direct financing
leases 2,132,205 2,151,112
Real estate held for sale -- 768,120
Cash 59,239 115,927
Accrued rental income 430,245 403,513
Liabilities 53,304 66,581
Partners' capital 8,489,012 9,396,092
Quarter Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------ ---------------- ------------- ----------------
Revenues $ 255,805 $ 256,495 $ 768,236 $ 773,971
Expenses (37,887) (37,676) (113,952) (112,122)
------------ ---------------- ------------- ----------------
Income from continuing operations 217,918 218,819 654,284 661,849
------------ ---------------- ------------- ----------------
Discontinued operations:
Revenues -- 30,062 54,518 90,776
Expenses -- (12,862) (6,965) (47,841)
Provision for write-down of assets -- -- -- (55,500)
Gain (loss) on disposal of
discontinued operations -- (29,509) 638,919 (29,509)
------------ ---------------- ------------- ----------------
-- (12,309) 686,472 (42,074)
------------ ---------------- ------------- ----------------
Net income $ 217,918 $ 206,510 $ 1,340,756 $ 619,775
============ ================ ============= ================
The Partnership recognized income of $583,155 and $211,897 during the
nine months ended September 30, 2004 and 2003, respectively, $82,174
and $71,184 of which were earned during the third quarters of 2004 and
2003, respectively, from these joint ventures and tenants-in-common
arrangements.
6
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2004 and 2003
4. Discontinued Operations
In June 2004, the Partnership identified for sale the property in
Nederland, Texas and reclassified the asset to real estate held for
sale. During the nine months ended September 30, 2004, the Partnership
recorded a provision for write-down of assets 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, less
cost to sell.
The following presents the operating results of the discontinued
operations for this property.
Quarter Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------ ---------------- ------------- ---------------
Rental revenues $ -- $ 21,896 $ 11,075 $ 65,687
Expenses (5,305) (4,338) (19,784) (18,945)
Provision for write-down of assets -- -- (44,261) --
------------ ---------------- ------------- ---------------
Income (loss) from discontinued $ (5,305) $ 17,558 $ (52,970) $ 46,742
operations
============ ================ ============= ===============
5. 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 total rental revenues
from the unconsolidated joint ventures and the properties held as
tenants-in-common with affiliates of the general partners), for each of
the periods ended September 30:
2004 2003
-------------- ---------------
Wend Vail Partnership, Ltd. $ 112,500 $ 112,500
In addition, the following schedule presents total rental revenues from
individual restaurant chains, each representing more than ten percent
of total rental revenues (including the Partnership's share of total
rental revenues from the unconsolidated joint ventures and the
properties held as tenants-in-common with affiliates of the general
partners), for each of the periods ended September 30:
2004 2003
-------------- ---------------
Wendy's Old Fashioned
Hamburger Restaurants $ 159,870 $ 159,895
Pizza Hut 123,644 122,318
Golden Corral Buffet and Grill N/A 119,504
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 properties have some geographical diversity in the United
States and the lessees operate a variety of restaurant concepts,
default by this lessee or any of these restaurant chains could
significantly impact the results of operations if the Partnership is
not able to re-lease the properties in a timely manner.
7
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2004 and 2003
6. Merger Transaction
On August 9, 2004, the Partnership entered into a definitive Agreement
and Plan of Merger pursuant to which the Partnership will be merged
with a subsidiary of U.S. Restaurant Properties, Inc. (NYSE: USV). The
merger is one of multiple concurrent transactions pursuant to which 17
other affiliated limited partnerships also will be merged with a
subsidiary of U.S. Restaurant Properties, Inc. and in which CNL
Restaurant Properties, Inc., an affiliate, also will be merged with
U.S. Restaurant Properties, Inc. CNL Restaurant Properties, Inc.
currently provides property management and other services to the
Partnership. The merger of the Partnership (and each of the 17 other
affiliated mergers) is subject to certain conditions including approval
by a majority of the limited partners, consummation of a minimum number
of limited partnership mergers representing at least 75.0% in value (as
measured by the value of the merger consideration) of all limited
partnerships, consummation of the merger between U.S. Restaurant
Properties, Inc. and CNL Restaurant Properties, Inc., approval of the
shareholders of U.S. Restaurant Properties, Inc., and availability of
financing. The transaction is expected to be consummated in the first
quarter of 2005.
Under the terms of the merger agreement, if the transaction is
approved, the limited partners will receive total consideration of
approximately $14.62 million, consisting of approximately $12.23
million in cash and approximately $2.39 million in U.S. Restaurant
Properties, Inc. Series A Convertible Preferred Stock that is listed on
the New York Stock Exchange. The general partners will receive total
consideration of approximately $331,000 consisting of approximately
$277,000 in cash and approximately $54,000 in preferred stock.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund II, Ltd. (the "Partnership," which may be referred to
as "we," "us," or "our") 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. We owned 17 Properties directly as of September 30,
2004 and 2003. We also owned seven and eight Properties indirectly through joint
venture or tenancy in common arrangements as of September 30, 2004 and 2003,
respectively.
Merger Transaction
The general partners believe their primary objective is to maintain
current operations with restaurant operators as successfully as possible, while
evaluating strategic alternatives, including alternatives that may provide
liquidity to the limited partners. Real estate markets are strong throughout
much of the nation, and the performance of restaurants has generally improved
after several challenging years. As a result, the general partners believe that
this is an attractive period for a strategic event to monetize the interests of
the limited partners.
In furtherance of this, on August 9, 2004, we entered into a definitive
Agreement and Plan of Merger pursuant to which we will be merged with a
subsidiary of U.S. Restaurant Properties, Inc. (NYSE: USV). The merger is one of
multiple concurrent transactions pursuant to which 17 other affiliated limited
partnerships also will be merged with a subsidiary of U.S. Restaurant
Properties, Inc. and in which CNL Restaurant Properties, Inc., an affiliate,
also will be merged with U.S. Restaurant Properties, Inc. Our merger (and each
of the 17 other affiliated mergers) is subject to certain conditions including
approval by a majority of the limited partners, consummation of a minimum number
of limited partnership mergers representing at least 75.0% in value (as measured
by the value of the merger consideration) of all limited partnerships,
consummation of the merger between U. S. Restaurant Properties, Inc. and CNL
Restaurant Properties, Inc., approval of the shareholders of U.S. Restaurant
Properties, Inc., and availability of financing. U.S. Restaurant Properties,
Inc. is a real estate investment trust (REIT) that focuses primarily on
acquiring, owning and leasing restaurant properties. The transaction is expected
to be consummated in the first quarter of 2005.
Under the terms of the merger agreement, if the transaction is
approved, our limited partners will receive total consideration of approximately
$14.62 million, consisting of approximately $12.23 million in cash and
approximately $2.39 million in U.S. Restaurant Properties, Inc. Series A
Convertible Preferred Stock that is listed on the New York Stock Exchange. The
general partners will receive total consideration of approximately $331,000
consisting of approximately $277,000 in cash and approximately $54,000 in
preferred stock.
We received an opinion from Wachovia Capital Markets, LLC that as of
August 9, 2004 the merger consideration to be received by the holders of our
general and limited partnership interests is fair, from a financial point of
view, to such holders.
As reflected above, the contemplated transactions are complex, and
contingent upon certain conditions. The restaurant marketplace, the real estate
industry, and the equities markets, all individually or taken as a whole, could
impact the economics of this transaction. As a result, there is no assurance
that we will be successful in completing the contemplated transaction.
Capital Resources
Net cash provided by operating activities was $901,066 and $987,085 for
the nine months ended September 30, 2004 and 2003, respectively.
In June 2004, Holland Joint Venture, in which we owned a 49% interest,
sold the Property in Holland, Michigan and received net sales proceeds of
approximately $1,399,600, resulting in a gain on disposal of discontinued
operations of approximately $638,900. As a result of the sale of the Property,
the joint venture was dissolved and we received approximately $671,200
representing our pro-rata share of the liquidating distribution from the joint
venture. We intend to use the liquidation proceeds to pay liabilities.
9
At September 30, 2004, we had $1,366,488 in cash and cash equivalents,
as compared to $922,370 at December 31, 2003. At September 30, 2004, these funds
were held in a demand deposit account at a commercial bank. The increase was
primarily a result of holding the liquidation proceeds from the dissolution of
Holland Joint Venture. The funds remaining at September 30, 2004, after the
payment of distributions and other liabilities, will be used to meet our working
capital needs.
Short-Term Liquidity
Our investment strategy of acquiring Properties for cash and leasing
them under triple-net leases to operators who generally meet specified financial
standards minimizes our operating expenses. The general partners believe that
the leases will generate net cash flow in excess of operating expenses.
Our short-term liquidity requirements consist primarily of our
operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
our operations.
We generally distribute cash from operations remaining after the
payment of operating expenses, to the extent that the general partners determine
that such funds are available for distribution. Based on current and anticipated
future cash from operations, and for the nine months ended September 30, 2004,
sales proceeds from a prior year sale, we declared distributions to limited
partners of $1,003,140 for the nine months ended September 30, 2004 and 2003
($334,380 for the quarters ended September 30, 2004 and 2003). This represents
distributions of $20.06 per unit for each of the nine months ended September 30,
2004 and 2003 ($6.69 for each applicable quarter). As a result of the sales of
Properties in prior years, our total revenues have declined and are expected to
remain reduced in subsequent periods, while the majority of our operating
expenses have remained and are expected to remain fixed. Due to the sales of
Properties, and due to current and anticipated cash from operations,
distributions of net cash flow have been adjusted during the quarters ended
September 30 and December 31, 2002. No distributions were made to the general
partners for the quarters and nine months ended September 30, 2004 and 2003. No
amounts distributed to the limited partners for the nine months ended September
30, 2004 and 2003 are required to be or have been treated as a return of capital
for purposes of calculating the limited partners' return on their adjusted
capital contributions. We intend to continue to make distributions of cash to
the limited partners on a quarterly basis.
Total liabilities, including distributions payable, were $755,588 at
September 30, 2004 as compared to $834,803 at December 31, 2003. The decrease
was primarily a result of paying a special distribution to the limited partners
that had been declared at December 31, 2003. The decrease was partially offset
by an increase in accounts payable and accrued expenses. The general partners
believe that we have sufficient cash on hand to meet our current working capital
needs.
Long-Term Liquidity
We have no long-term debt or other long-term liquidity requirements.
Results of Operations
Rental revenues from continuing operations were $686,219 for the nine
months ended September 30, 2004 as compared to $682,736 in the same period in
2003, $231,076 and $228,839 of which were earned during the third quarters of
2004 and 2003, respectively. Rental revenues from continuing operations remained
relatively constant because the changes in the leased Property portfolio related
to the Property accounted for as discontinued operations.
We earned $28,162 in contingent rental income during the nine months
ended September 30, 2004, as compared to $30,312 during the same period of 2003,
$19,100 and $16,986 of which was earned during the third quarters of 2004 and
2003, respectively.
10
We earned $583,155 attributable to net income earned by unconsolidated
joint ventures during the nine months ended September 30, 2004, as compared to
$211,897 during the same period of 2003, $82,174 and $71,184 of which were
earned during the third quarters of 2004 and 2003, respectively. The increase in
net income earned by unconsolidated joint ventures was primarily due to the gain
of approximately $638,900 on the sale of the Property owned by Holland Joint
Venture in June 2004, in which we owned a 49% interest. As a result of this
sale, the Joint Venture was dissolved in the same month. The increase, in 2004
as compared to 2003, was also due to a provision for write-down of assets of
$55,500 recorded in 2003 by Show Low Joint Venture, in which we owned a 64%
interest.
During the nine months ended September 30, 2004, one of our lessees,
Wend Vail Partnership, Ltd., contributed more than 10% of our total rental
revenues (including our share of total rental revenues from the Properties owned
by the unconsolidated joint ventures and Properties owned with affiliates of the
general partners as tenants-in-common). It is anticipated that based on the
minimum annual rental payments required by the lease, this lessee will continue
to contribute more than 10% of our total rental revenues. In addition, during
the nine months ended September 30, 2004, two restaurant chains, Wendy's Old
Fashioned Hamburger Restaurants and Pizza Hut accounted for more than 10% of our
total rental revenues (including our share of total rental revenues from the
Properties owned by the unconsolidated joint ventures and Properties owned with
affiliates of the general partners as tenants-in-common). It is anticipated that
these restaurant chains will continue to account for more than 10% of the total
rental revenues to which we are entitled under the terms of its leases. Any
failure of this lessee or these restaurant chains will materially affect our
operating results if we are not able to re-lease the Properties in a timely
manner.
Operating expenses, including depreciation and amortization expense,
were $348,056 during the nine months ended September 30, 2004, as compared to
$286,187 during the same period of 2003, $117,152 and $89,318 of which were
incurred during the third quarters of 2004 and 2003, respectively. Operating
expenses were higher during the quarter and nine months ended September 30,
2004, as compared to the same periods in 2003, because we incurred additional
general operating and administrative expenses, including, primarily, legal fees
incurred in connection with the merger transaction discussed above. The increase
in operating expenses during the nine months ended September 30, 2004, was also
due to an increase in the amount of state tax expense relating to several states
in which we conduct business.
We recognized income from discontinued operations (rental revenues less
property related expenses and provision for write-down of assets) of $17,558 and
$46,742 during the quarter and nine months ended September 30, 2003,
respectively, and losses from discontinued operations of $5,305 and $52,970 for
the quarter and nine months ended September 30, 2004, respectively, relating to
the vacant Property in Nederland, Texas. During the nine months ended September
30, 2004, we recorded a provision for write-down of assets of approximately
$44,300 in anticipation of the sale of this Property. The provision represented
the difference between the carrying value of the Property and the estimated fair
value, less cost to sell. As of November 5, 2004, the sale of this Property had
not occurred.
In June 2004, Holland Joint Venture, in which we owned a 49% interest,
sold its Property in Holland, Michigan, as described above. The financial
results relating to this Property were classified as Discontinued Operations in
the combined, condensed financial information for the unconsolidated joint
ventures and the properties held as tenants-in-common with affiliates reported
in the footnotes to the accompanying financial statements. Our pro-rata shares
of these amounts were included in equity in earnings of the unconsolidated joint
ventures in the accompanying financial statements.
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. We adopted FIN 46R during the quarter ended March
31, 2004. We were 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.
11
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 our
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 our 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.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
-----------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
-----------------------------------------------------------
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
2.1 Agreement and Plan of Merger among U.S. Restaurant
Properties, Inc., Ivanhoe Acquisition II, LLC, and CNL
Income Fund II, Ltd., dated as of August 9, 2004.
(Included as Exhibit 99.2 to Form 8-K filed with the
Securities and Exchange Commission on August 9, 2004,
and incorporated herein by reference.)
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.)
13
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.)
14
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 11th day of November 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
Exhibits
2.1 Agreement and Plan of Merger among U.S. Restaurant
Properties, Inc., Ivanhoe Acquisition II, LLC, and CNL
Income Fund II, Ltd., dated as of August 9, 2004.
(Included as Exhibit 99.2 to Form 8-K filed with the
Securities and Exchange Commission on August 9, 2004,
and incorporated herein by reference.)
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