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, 1997
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 juris- (I.R.S. Employer
diction of incorporation Identification No.)
or organization)
400 E. South Street, #500
Orlando, Florida 32801
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number
(including area code) (407) 422-1574
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
<PAGE>
CONTENTS
Part I Page
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4-5
Notes to Condensed Financial Statements 6-10
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 11-16
Part II
Other Information 17
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
September 30, December 31,
ASSETS 1997 1996
------------- ------------
Land and buildings on operating
leases, less accumulated
depreciation of $3,875,753
and $3,816,091 $15,649,650 $16,803,789
Investment in joint ventures 1,418,028 1,314,386
Mortgage note receivable 42,000 -
Cash and cash equivalents 206,857 318,756
Restricted cash 1,264,846 -
Receivables, less allowance for
doubtful accounts of $111,825
and $126,036 135,688 99,185
Prepaid expenses 6,467 4,819
Lease costs, less accumulated
amortization of $10,524 and
$7,537 10,039 13,026
Accrued rental income 138,382 117,357
----------- -----------
$18,871,957 $18,671,318
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 8,916 $ 12,188
Accrued construction costs payable - 29,526
Accrued and escrowed real estate
taxes payable 3,279 6,449
Distributions payable 594,000 594,000
Due to related parties 103,181 45,078
Rents paid in advance and deposits 37,789 46,308
----------- -----------
Total liabilities 747,165 733,549
Commitments (Note 7)
Partners' capital 18,124,792 17,937,769
----------- -----------
$18,871,957 $18,671,318
=========== ===========
See accompanying notes to condensed financial statements.
1
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
-------- -------- ---------- ----------
<S> <C>
Revenues:
Rental income from
operating leases $522,972 $559,524 $1,567,356 1,672,199
Contingent rental income 22,393 24,516 22,393 39,155
Interest and other
income 17,521 7,332 34,466 17,790
-------- -------- ---------- ----------
562,886 591,372 1,624,215 1,729,144
-------- -------- ---------- ----------
Expenses:
General operating and
administrative 33,496 30,863 93,225 104,945
Bad debt expense - - 18,033 -
Professional services 3,557 5,438 13,907 18,121
Real estate taxes - 1,181 1,259 3,861
State and other taxes - - 10,403 4,255
Depreciation and
amortization 101,486 105,399 312,034 316,197
-------- -------- ---------- ----------
138,539 142,881 448,861 447,379
-------- -------- ---------- ----------
Income Before Equity in
Earnings of Joint
Ventures and Gain on Sale
of Land and Buildings 424,347 448,491 1,175,354 1,281,765
Equity in Earnings of
Joint Ventures 40,610 38,423 333,517 112,764
Gain on Sale of Land and
Buildings 301,901 - 460,152 -
-------- -------- ---------- ---------
Net Income $766,858 $486,914 $1,969,023 $1,394,529
======== ======== ========== ==========
Allocation of Net Income:
General partners $ 5,636 $ 4,869 $ 17,583 $ 13,945
Limited partners 761,222 482,045 1,951,440 1,380,584
-------- -------- ---------- ----------
$766,858 $486,914 $1,969,023 $1,394,529
======== ======== ========== ==========
Net Income Per Limited
Partner Unit $ 15.22 $ 9.64 $ 39.03 $ 27.61
======== ======== ========== ==========
Weighted Average Number
of Limited Partner Units
Outstanding 50,000 50,000 50,000 50,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Nine Months Ended Year Ended
September 30, December 31,
1997 1996
----------------- -----------
General partners:
Beginning balance $ 342,375 $ 323,705
Net income 17,583 18,670
----------- -----------
359,958 342,375
----------- -----------
Limited partners:
Beginning balance 17,595,394 18,123,103
Net income 1,951,440 1,848,291
Distributions ($35.64 and
$47.52 per limited partner
unit, respectively) (1,782,000) (2,376,000)
----------- -----------
17,764,834 17,595,394
----------- -----------
Total partners' capital $18,124,792 $17,937,769
=========== ===========
See accompanying notes to condensed financial statements.
3
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1997 1996
----------- -----------
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating
Activities $ 1,579,694 $ 1,773,495
----------- -----------
Cash Flows from Investing
Activities:
Proceeds from sale of land
and buildings 1,259,417 -
Additions to land and buildings
on operating leases (29,526) -
Return of capital from joint
venture 124,440 -
Increase in restricted cash (1,259,417) -
Payment of lease costs (4,507) (1,930)
Increase in other assets - (7,580)
----------- -----------
Net cash provided by (used
in) investing activities 90,407 (9,510)
----------- -----------
Cash Flows from Financing
Activities:
Proceeds from loans from
corporate general partner 721,000 105,900
Repayment of loans from
corporate general partner (721,000) (105,900)
Distributions to limited
partners (1,782,000) (1,782,000)
----------- -----------
Net cash used in financing
activities (1,782,000) (1,782,000)
----------- -----------
Net Decrease in Cash and Cash
Equivalents (111,899) (18,015)
Cash and Cash Equivalents at Beginning
of Period 318,756 360,062
----------- -----------
Cash and Cash Equivalents at End of
Period $ 206,857 $ 342,047
=========== ===========
See accompanying notes to condensed financial statements.
4
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
Nine Months Ended
September 30,
1997 1996
----------- -----------
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage note accepted in exchange
for sale of land and building $ 42,000 $ -
=========== ===========
Distributions declared and unpaid
at end of period $ 594,000 $ 594,000
=========== ===========
See accompanying notes to condensed financial statements.
5
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1997 and 1996
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 management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and nine months ended September 30, 1997, may not be
indicative of the results that may be expected for the year ending
December 31, 1997. Amounts as of December 31, 1996, 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, 1996.
2. Land and Buildings on Operating Leases:
In June 1997, the Partnership sold its property in Eagan, Minnesota, to
the tenant, for $668,033 and received net sales proceeds of $665,882,
of which $42,000 were in the form of a promissory note, resulting in a
gain of $158,251 for financial reporting purposes. This property was
originally acquired by the Partnership in August 1987 and had a cost of
approximately $601,100, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $64,800 in excess of its original purchase price.
In September 1997, the Partnership sold its property in Jacksonville,
Florida, to an unrelated third party, for $675,000 and received net
sales proceeds (net of $3,827 which represents amounts due to the
former tenant for prorated rent) of $635,535, resulting in a gain of
$301,901 for financial reporting purposes. This property was originally
acquired by the Partnership in September 1987 and had a cost of
approximately $405,000, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $234,000 in excess of its original purchase price.
6
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1997 and 1996
3. Investment in Joint Ventures:
In January 1997, Show Low Joint Venture, in which the Partnership owns
a 64 percent interest, sold its property to the tenant for $970,000,
resulting in a gain to the joint venture of approximately $360,000 for
financial reporting purposes. The property was originally contributed
to Show Low Joint Venture in July 1990 and had a total cost of
approximately $663,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the joint venture sold the property
for approximately $306,500 in excess of its original purchase price.
In June 1997, Show Low Joint Venture reinvested $782,413 of the net
sales proceeds in a Darryl's property in Greensboro, North Carolina. As
of September 30, 1997, the Partnership and the other joint venture
partner had received approximately $124,400 and $70,000, respectively,
representing a return of capital, for the remaining unreinvested net
sales proceeds. As of September 30, 1997, the Partnership owned a 64
percent interest in the profits and losses of the joint venture.
The following presents the combined, condensed financial information
for all of the Partnership's investments in joint ventures at:
September 30, December 31,
1997 1996
Land and buildings on
operating leases, less
accumulated depreciation $2,333,983 $2,664,752
Net investment in direct
financing lease 519,751 -
Cash 34,408 21,905
Receivables - 9,980
Accrued rental income 87,951 70,782
Other assets 362 44,263
Liabilities 34,555 28,558
Partners' capital 2,941,900 2,783,124
Revenues 270,985 363,338
Gain on sale 360,002 -
Net income 575,728 250,026
The Partnership recognized income totalling $333,517 and $112,764 for
the nine months ended September 30, 1997 and 1996, respectively, from
these joint ventures, $40,610 and $38,423 of which was earned for the
quarters ended September 30, 1997 and 1996, respectively.
7
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1997 and 1996
4. Mortgage Note Receivable:
In connection with the sale in June 1997 of its property in Eagan,
Minnesota, the Partnership accepted a promissory note in the amount of
$42,000. The promissory note bears interest at a rate of 10.50% per
annum, is collateralized by personal property and is being collected in
18 monthly installments of interest only and thereafter, the entire
principal sum shall become due.
5. Restricted Cash:
As of September 30, 1997, the net cash sales proceeds of $1,259,417
from the sale of the properties in Eagan, Minnesota, and Jacksonville,
Florida plus accrued interest of $5,429, were being held in an
interest-bearing escrow account pending the release of funds by the
escrow agent to acquire additional properties on behalf of the
Partnership.
6. Concentration of Credit Risk:
The following schedule presents total rental income from individual
lessees, each representing more than ten percent of the Partnerships'
total rental income (including the Partnership's share of rental income
from joint ventures and the property held as tenants-in-common with an
affiliate) for at least one of the quarters ended September 30:
1997 1996
-------- --------
Golden Corral Corporation $294,197 $293,073
Kentucky Fried Chicken of
California, Inc. 181,653 181,817
Restaurant Management Services,
Inc. 171,329 171,329
8
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1997 and 1996
6. Concentration of Credit Risk - Continued:
In addition, the following schedule presents total rental income from
individual restaurant chains, each representing more than ten percent
of the Partnership's total rental income (including the Partnership's
share of rental income from joint ventures and the property held as
tenants-in-common with an affiliate) for at least one of the quarters
ended September 30:
1997 1996
-------- ---------
Wendy's Old Fashioned
Hamburger Restaurants $320,419 $316,337
Golden Corral Family
Steakhouse Restaurants 294,197 293,073
KFC 222,705 276,969
Denny's 174,494 293,113
Popeyes Famous Fried
Chicken Restaurants 171,329 171,329
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 any one of these lessees or
restaurant chains could significantly impact the results of operations
of the Partnership. However, the general partners believe that the risk
of such a default is reduced due to the essential or important nature
of these properties for the on-going operations of the lessees.
7. Commitments:
In February 1997, the Partnership entered into a sales contract with a
third party to sell the Denny's property in Plant City, Florida. In
addition, in September 1997, the Partnership entered into sales
contracts with the tenant to sell the two Wendy's properties in
Farmington Hills, Michigan. The Denny's and Wendy's properties were
sold in October 1997 (see Note 8).
In September 1997, the Partnership entered into a sales contract with a
third party to sell the Pizza Hut property in Mathis, Texas. The
general partners believe that the anticipated sales price for the
property in Mathis, Texas will exceed the carrying cost associated with
the property; however, the sale of this property had not occurred as of
October 31, 1997.
9
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1997 and 1996
8. Subsequent Event:
In October 1997, the Partnership sold its property in Plant City,
Florida, to a third party for $931,006 and received net sales proceeds
of $910,061, resulting in a gain of approximately $223,300 for
financial reporting purposes. The Partnership intends to reinvest the
net sales proceeds in an additional property.
In addition, in October 1997, the Partnership sold the Wendy's property
(10-mile Road) in Farmington Hills, Michigan, for $746,000 and received
net sales proceeds (net of $5,020 which represents amounts due for
prorated rent) of $734,126, resulting in a gain of approximately
$190,100 for financial reporting purposes. In addition, the Partnership
sold the other Wendy's property (12-mile Road) in Farmington Hills,
Michigan, for $975,000 and received net sales proceeds (net of $6,557
which represents amounts due for prorated rent) of $958,587, resulting
in a gain of approximately $249,000 for financial reporting purposes.
In connection with the sale of both of the Farmington Hills, Michigan
properties, the Partnership also received $214,000 from the former
tenant in consideration of the Partnership's releasing the tenant from
its obligation under the terms of the leases. The Partnership intends
to reinvest the net sales proceeds from both properties in additional
properties.
In addition, in October 1997, the Partnership reinvested the net cash
sales proceeds of approximately $623,900 from the sale in June 1997, of
the property in Eagan, Minnesota, in a Boston Market property in Mesa,
Arizona, as tenants-in-common with an affiliate of the general
partners. In connection therewith, the Partnership and its affiliate
entered into an agreement whereby each co-venturer will share in the
profits and losses of the property in proportion to each co-venturer's
interest. The Partnership owns an approximate 57 percent interest in
the property.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CNL Income Fund II, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on November 13, 1986, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurant properties, as well as land upon which restaurants were to
be constructed, which are leased primarily to operators of national and regional
fast-food restaurant chains (collectively, the "Properties"). The leases
generally are triple-net leases, with the lessees responsible for all repairs
and maintenance, property taxes, insurance and utilities. As of September 30,
1997, the Partnership owned 38 Properties, including three Properties owned by
joint ventures in which the Partnership is a co-venturer and one Property owned
with an affiliate as tenants-in-common.
Liquidity and Capital Resources
The Partnership's primary source of capital for the nine months ended
September 30, 1997 and 1996, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and other
income received, less cash paid for expenses). Cash from operations was
$1,579,694 and $1,773,495 for the nine months ended September 30, 1997 and 1996,
respectively. The decrease in cash from operations for the nine months ended
September 30, 1997, as compared with the nine months ended September 30, 1996,
is primarily a result of changes in income and expenses as discussed in "Results
of Operations" below and changes in the Partnership's working capital.
Other sources and uses of capital included the following during the
nine months ended September 30, 1997.
In January 1997, Show Low Joint Venture, in which the Partnership owns
a 64 percent interest, sold its Property to the tenant for $970,000, resulting
in a gain to the joint venture of approximately $360,000 for financial reporting
purposes. The Property was originally contributed to Show Low Joint Venture in
July 1990 and had a total cost of approximately $663,500, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the joint venture sold
the Property for approximately $306,500 in excess of its original purchase
price. In June 1997, Show Low Joint Venture reinvested $782,413 of the net sales
proceeds in a Darryl's Property in Greensboro, North Carolina. As of September
30, 1997, the Partnership and the other joint venture partner had received
approximately $124,400 and $70,000, respectively, representing a return of
capital, for the remaining unreinvested net sales proceeds.
In June 1997, the Partnership sold its Property in Eagan, Minnesota, to
the tenant, for $668,033 and received net sales proceeds of $665,882, of which
$42,000 were in the form of a promissory note, resulting in a gain of $158,251
for financial reporting purposes. This Property was originally acquired by the
11
<PAGE>
Liquidity and Capital Resources - Continued
Partnership in August 1987 and had a cost of approximately $601,100, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the Property for approximately $64,800 in excess of its
original purchase price. As of September 30, 1997, the net cash sales proceeds
of $623,882 plus accrued interest of $6,095, were being held in an
interest-bearing escrow account pending the release of funds by the escrow agent
to acquire an additional Property. In October 1997, the Partnership reinvested
the net cash sales proceeds of approximately $623,900 in a Boston Market
Property in Mesa, Arizona as tenants-in-common with an affiliate of the general
partners. In connection therewith, the Partnership and its affiliate entered
into an agreement whereby each co-venturer will share in the profits and losses
of the Property in proportion to each co-venturer's interest. The Partnership
owns an approximate 57 percent interest in the Property. The general partners
believe that the transaction, or a portion thereof, relating to the sale of the
Property in Eagan, Minnesota, and the reinvestment of the proceeds in a Boston
Market Property in Mesa, Arizona, will qualify as a like-kind exchange
transaction for federal income tax purposes. The Partnership anticipates that it
will distribute amounts sufficient to enable the limited partners to pay federal
and state income taxes, if any (at a level reasonably assumed by the general
partners), resulting from the sale of the Property in Eagan, Minnesota.
In connection with the sale in June 1997 of its Property in Eagan,
Minnesota, the Partnership accepted a promissory note in the principal sum of
$42,000. The promissory note bears interest at a rate of 10.50% per annum, is
collateralized by personal property and is being collected in 18 monthly
installments of interest only and thereafter, the entire principal sum shall
become due.
In September 1997, the Partnership sold its Property in Jacksonville,
Florida, to an unrelated third party, for $675,000 and received net sales
proceeds (net of $3,827 which represents amounts due to the former tenant for
prorated rent) of $635,535, resulting in a gain of $301,901 for financial
reporting purposes. This Property was originally acquired by the Partnership in
September 1987 and had a cost of approximately $405,000, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Partnership sold the
Property for approximately $234,000 in excess of its original purchase price. As
of September 30, 1997, the net sales proceeds of $635,535 plus accrued interest
of $1,284 less escrow fees of $1,950, were being held in an interest-bearing
escrow account pending the release of funds by the escrow agent to acquire an
additional Property. The general partners believe that the transaction, or a
portion thereof, relating to the sale of the Property in Jacksonville, Florida
and the reinvestment of the proceeds will be structured to qualify as a
like-kind exchange transaction for federal income tax purposes.
12
<PAGE>
Liquidity and Capital Resources - Continued
In January, April and July 1997, the Partnership entered into
promissory notes with the corporate general partner for loans in the amounts of
$147,000, $224,000 and $350,000, respectively, in connection with the operations
of the Partnership. The loans were uncollateralized, non-interest bearing and
due on demand. As of September 30, 1997, the Partnership had repaid the loans in
full to the corporate general partner.
Currently, rental income from the Partnership's Properties is invested
in money market accounts or other short-term, highly liquid investments pending
the Partnership's use of such funds to pay Partnership expenses or to make
distributions to the partners. At September 30, 1997, the Partnership had
$206,857 invested in such short-term investments, as compared to $318,756 at
December 31, 1996. The funds remaining at September 30, 1997, will be used
towards the payment of distributions and other liabilities.
Total liabilities of the Partnership, including distributions payable,
increased to $747,165 at September 30, 1997, from $733,549 at December 31, 1996.
Liabilities at September 30, 1997, to the extent they exceed cash and cash
equivalents at September 30, 1997, will be paid from future cash from
operations, from the loan received from the corporate general partner in October
1997 described above, and, in the event the general partners elect to make
additional capital contributions or loans to the Partnership, from future
general partner capital contributions or loans.
In February 1997, the Partnership entered into a sales contract with an
unrelated third party to sell the Denny's Property in Plant City, Florida. In
October 1997, the Partnership sold this Property for $931,006 and received net
sales proceeds of $910,061, resulting in a gain of approximately $223,300 for
financial reporting purposes. The Partnership intends to reinvest the net sales
proceeds in an additional Property.
In September 1997, the Partnership entered into sales contracts with
the tenant to sell the two Wendy's Properties in Farmington Hills, Michigan. In
October 1997, the Partnership sold the Wendy's Property (10-mile Road) in
Farmington Hills, Michigan, for $746,000 and received net sales proceeds (net of
$5,020 which represents amounts due for prorated rent) of $734,126, resulting in
a gain of approximately $190,100 for financial reporting purposes. In addition,
the Partnership sold the other Wendy's Property (12- mile Road) in Farmington
Hills, Michigan, for $975,000 and received net sales proceeds (net of $6,557
which represents amounts due for prorated rent) of $958,587, resulting in a gain
of approximately $249,000 for financial reporting purposes. In connection with
the sale of both of the Farmington Hills, Michigan Properties, the Partnership
also received $214,000 from the former tenant in consideration of the
Partnership's releasing the tenant from its obligation under the terms of the
leases. The Partnership intends to reinvest the net sales proceeds from both
Properties in additional Properties.
13
<PAGE>
Liquidity and Capital Resources - Continued
In September 1997, the Partnership entered into a sales contract with
an unrelated third party to sell the Pizza Hut Property in Mathis, Texas. The
general partners believe that the anticipated sales price for this Property will
exceed the carrying cost associated with the Property; however, the sale of this
Property had not occurred as of October 31, 1997. The Partnership intends to
reinvest the net sales proceeds in a replacement Property.
Based on current and anticipated future cash from operations, the loans
received from the corporate general partner in January, April and July 1997, and
the $214,000 in termination fees it received in conjunction with the sale of the
two Properties in Farmington Hills, Michigan, in October 1997, as discussed
above, the Partnership declared distributions to limited partners of $1,782,000
for each of the nine months ended September 30, 1997 and 1996 ($594,000 for each
of the quarters ended September 30, 1997 and 1996). This represents
distributions for each applicable nine months of $35.64 per unit ($11.88 per
unit for each of the quarters ended September 30, 1997 and 1996). No
distributions were made to the general partners for the quarters and nine months
ended September 30, 1997 and 1996. No amounts distributed or to be distributed
to the limited partners for the nine months ended September 30, 1997 and 1996,
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.
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 cash flow
in excess of 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
the operations of the Partnership.
Results of Operations
During each of the nine months ended September 30, 1997 and 1996, the
Partnership owned and leased 36 wholly owned Properties (including one Property
in Eagan, Minnesota, which was sold in June 1997 and one Property in
Jacksonville, Florida, which was sold in September 1997) to operators of
fast-food and family-style restaurant chains. In connection therewith, during
the nine months ended September 30, 1997 and 1996, the Partnership earned
$1,567,356 and $1,672,199, respectively, in rental income from these Properties,
$522,972 and $559,524 of which was earned during the quarters ended September
30, 1997 and 1996, respectively. Rental income decreased approximately $36,600
and $104,800 during
14
<PAGE>
Results of Operations - Continued
the quarter and nine months ended September 30, 1997, respectively.
Approximately $25,700 and $63,200 of the decrease for the quarter and nine
months ended September 30, 1997, respectively, resulted from the fact that in
February 1997, the Partnership discontinued billing the former tenant of the
Property in Plant City, Florida, in connection with the sales contract entered
into by the Partnership and an unrelated third party, in February 1997, as
discussed above in "Liquidity and Capital Resources." In addition, approximately
$18,000 and $54,100 of the decrease for the quarter and nine months ended
September 30, 1997, respectively, resulted from the Partnership increasing its
allowance for doubtful accounts and then selling the Property in Eagan,
Minnesota, in June 1997, as discussed above in "Liquidity and Capital
Resources". In connection with the sale, the Partnership wrote-off the allowance
for doubtful accounts.
The decrease in rental income was partially offset by an increase of
approximately $6,100 for the quarter and nine months ended September 30, 1997
due to the fact that rental payments began in July 1997 under the new lease for
the Property in Lombard, Illinois.
For the nine months ended September 30, 1996, the Partnership also
owned and leased three Properties indirectly through joint venture arrangements
and one Property as tenants-in-common with an affiliate of the general partners
and for the nine months ended September 30, 1997, the Partnership owned and
leased four Properties indirectly through joint venture arrangements (including
one Property in Show Low Joint Venture, which was sold in January 1997) and one
Property as tenants-in-common with an affiliate of the general partners. In
connection therewith, during the nine months ended September 30, 1997 and 1996,
the Partnership earned $333,517 and $112,764, respectively, attributable to net
income earned by these joint ventures, $40,610 and $38,423 of which was earned
during the quarters ended September 30, 1997 and 1996, respectively. The
increase in net income earned by joint ventures is primarily attributable to the
fact that in January 1997, Show Low Joint Venture, in which the Partnership owns
a 64 percent interest, recognized a gain of approximately $360,000 for financial
reporting purposes as a result of the sale of its Property in January 1997, as
described above in "Liquidity and Capital Resources". Show Low Joint Venture
reinvested the majority of the net sales proceeds in an additional property in
June 1997.
During the nine months ended September 30, 1997, three of the
Partnership's lessees, Golden Corral Corporation, Restaurant Management
Services, Inc. and Kentucky Fried Chicken of California, Inc., each contributed
more than ten percent of the Partnership's total rental income (including the
Partnership's share of rental income from three Properties owned by joint
ventures and one Property owned with an affiliate as tenants-in-common). As of
September 30, 1997, Golden Corral Corporation was the lessee under
15
<PAGE>
Results of Operations - Continued
leases relating to five restaurants, Restaurant Management Services, Inc. was
the lessee under leases relating to four restaurants and Kentucky Fried Chicken
of California, Inc. was the lessee under leases relating to four restaurants. It
is anticipated that, based on the minimum annual rental payments required by the
leases Golden Corral Corporation will continue to contribute more than ten
percent of the Partnership's total rental income during the remainder of 1997
and subsequent years. In addition, five Restaurant Chains, Golden Corral Family
Steakhouse Restaurants, Denny's, KFC, Popeyes Famous Fried Chicken Restaurants
and Wendy's Old Fashioned Hamburger Restaurants, each accounted for more than
ten percent of the Partnership's total rental income during the nine months
ended September 30, 1997 (including the Partnership's share of the rental income
from three Properties owned by joint ventures and one Property owned with an
affiliate as tenants-in-common). During the remainder of 1997 and subsequent
years, it is anticipated that Golden Corral Family Steakhouse Restaurants,
Denny's, KFC and Wendy's Old Fashioned Hamburger Restaurants each will continue
to account for more than ten percent of the total rental income to which the
Partnership is entitled under the terms of its leases. Any failure of these
lessees or Restaurant Chains could materially affect the Partnership's income.
Operating expenses, including depreciation and amortization, were
$448,861 and $447,379 for the nine months ended September 30, 1997 and 1996,
respectively, of which $138,539 and $142,881 were incurred for the quarters
ended September 30, 1997 and 1996, respectively. The increase in operating
expenses during the nine months ended September 30, 1997, as compared to the
nine months ended September 30, 1996, is due to the fact that the Partnership
wrote-off past due rental amounts relating to the Property in Eagan, Minnesota,
in conjunction with the sale of this Property, in June 1997. The increase was
partially offset by the decrease in accounting and administrative expenses
associated with operating the Partnership and its Properties.
As a result of the sales of the Properties in Eagan, Minnesota and
Jacksonville, Florida, as discussed above in "Liquidity and Capital Resources,"
the Partnership recognized a gain of $301,901 and $460,152 for financial
reporting purposes during the quarter and nine months ended September 30, 1997,
respectively. No Properties were sold during the quarter and nine months ended
September 30, 1996.
16
<PAGE>
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 - None.
(b) No reports on Form 8-K were filed during the quarter
ended September 30, 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 10th day of November, 1997.
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)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund II, Ltd. at September 30, 1997, and its statement of
income for the nine months then ended and is qualified in its entirety by
reference to the Form 10Q of CNL Income Fund II, Ltd. for the nine months ended
September 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,471,703
<SECURITIES> 0
<RECEIVABLES> 247,513
<ALLOWANCES> 111,825
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 19,525,403
<DEPRECIATION> 3,875,753
<TOTAL-ASSETS> 18,871,957
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 18,124,792
<TOTAL-LIABILITY-AND-EQUITY> 18,871,957
<SALES> 0
<TOTAL-REVENUES> 1,624,215
<CGS> 0
<TOTAL-COSTS> 430,828
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18,033
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,969,023
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,969,023
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,969,023
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund II, Ltd. has an unclassified
balance sheet, therefore, no values are shown above for current assets and
current liabilities.
</FN>
</TABLE>
