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, 1998
-------------------------
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 (I.R.S. Employer
of incorporation or organiza- Identification No.)
tion)
400 E. South Street
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
Notes to Condensed Financial Statements 5-8
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 9-12
Part II
Other Information 13
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
March 31, December 31,
ASSETS 1998 1997
----------- ------------
Land and buildings on operating
leases, less accumulated
depreciation of $3,384,411
and $3,302,095 $13,082,252 $13,164,568
Investment in joint ventures 4,381,601 3,568,155
Mortgage note receivable 42,367 42,734
Cash and cash equivalents 1,069,775 470,194
Restricted cash 1,044,425 2,470,175
Receivables, less allowance for
doubtful accounts of $80,816
and $83,254 37,006 80,577
Prepaid expenses 4,494 5,510
Lease costs, less accumulated
amortization of $12,516 and
$11,520 8,047 9,043
Accrued rental income 155,364 148,103
----------- -----------
$19,825,331 $19,959,059
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 3,346 $ 7,170
Accrued and escrowed real estate
taxes payable 6,466 4,656
Distributions payable 1,747,628 594,000
Due to related parties 185,461 126,284
Rents paid in advance and deposits 41,888 25,300
----------- -----------
Total liabilities 1,984,789 757,410
Partners' capital 17,840,542 19,201,649
----------- -----------
$19,825,331 $19,959,059
=========== ===========
See accompanying notes to condensed financial statements.
1
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended
March 31,
1998 1997
-------- ------
Revenues:
Rental income from operating leases $432,820 $526,860
Interest and other income 22,954 7,708
-------- --------
455,774 534,568
-------- --------
Expenses:
General operating and administrative 29,926 30,012
Professional services 5,716 4,015
Real estate taxes - 1,259
State and other taxes 14,565 10,200
Depreciation and amortization 83,312 105,887
-------- --------
133,519 151,373
-------- --------
Income Before Equity in Earnings of
Joint Ventures and Real Estate
Disposition Fees 322,255 383,195
Equity in Earnings of Joint
Ventures 109,416 259,857
Real Estate Disposition Fee (45,150) -
-------- -------
Net Income $386,521 $643,052
======== ========
Allocation of Net Income:
General partners $ 4,317 $ 6,431
Limited partners 382,204 636,621
-------- --------
$386,521 $643,052
======== ========
Net Income Per Limited Partner Unit $ 7.64 $ 12.73
======== ========
Weighted Average Number of Limited
Partner Units Outstanding 50,000 50,000
======== ========
See accompanying notes to condensed financial statements.
2
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Quarter Ended Year Ended
March 31, December 31,
1998 1997
------------- -------------
General partners:
Beginning balance $ 373,111 $ 342,375
Net income 4,317 30,736
----------- -----------
377,428 373,111
----------- -----------
Limited partners:
Beginning balance 18,828,538 17,595,394
Net income 382,204 3,609,144
Distributions ($34.95 and
$47.52 per limited partner
unit, respectively) (1,747,628) (2,376,000)
----------- -----------
17,463,114 18,828,538
----------- -----------
Total partners' capital $17,840,542 $19,201,649
=========== ===========
See accompanying notes to condensed financial statements.
3
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Quarter Ended
March 31,
1998 1997
---------- ----------
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating
Activities $ 596,047 $ 556,561
---------- ----------
Cash Flows from Investing Activities:
Additions to land and buildings on
operating leases - (29,526)
Investment in joint ventures (834,888) -
Decrease in restricted cash 1,432,422 -
Payment of lease costs - (850)
---------- ----------
Net cash provided by (used
in) investing activities 597,534 (30,376)
---------- ----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate
general partner - 147,000
Repayment of loans from corporate
general partner - (147,000)
Distributions to limited partners (594,000) (594,000)
---------- ----------
Net cash used in financing
activities (594,000) (594,000)
---------- ----------
Net Increase (Decrease) in Cash and
Cash Equivalents 599,581 (67,815)
Cash and Cash Equivalents at Beginning
of Quarter 470,194 318,756
---------- ----------
Cash and Cash Equivalents at End of
Quarter $1,069,775 $ 250,941
========== ==========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Deferred real estate disposition
fees incurred and unpaid at end
of quarter $ 45,150 $ -
========== =========
Distributions declared and unpaid
at end of quarter $1,747,628 $ 594,000
========== ==========
See accompanying notes to condensed financial statements.
4
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1998 and 1997
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 ended March 31, 1998, may not be indicative of the results
that may be expected for the year ending December 31, 1998. Amounts as
of December 31, 1997, 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, 1997.
2. Investment in Joint Ventures:
During the quarter ended March 31, 1998, the Partnership acquired a
39.42% and a 13.38% interest in a property in Overland Park, Kansas,
and a property in Memphis, Tennessee, respectively, as
tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investments in these properties using the
equity method since the Partnership shares control with affiliates, and
amounts relating to its investments are included in investment in joint
ventures.
5
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters Ended March 31, 1998 and 1997
2. Investment in Joint Ventures - Continued:
The following presents the combined, condensed financial information
for all of the Partnership's investments in joint ventures at:
March 31, December 31,
1998 1997
Land and buildings on
operating leases, less
accumulated depreciation $8,550,096 $7,091,781
Net investment in direct
financing leases 2,125,703 518,399
Cash 45,058 56,815
Receivables 829 4,685
Accrued rental income 135,964 102,913
Other assets 406 418
Liabilities 43,617 31,673
Partners' capital 10,814,439 7,743,338
Revenues 316,562 399,579
Gain on sale of land and
building - 360,002
Net income 264,254 687,021
The Partnership recognized income totalling $109,416 and $259,857 for
the quarters ended March 31, 1998 and 1997, respectively, from these
joint ventures.
3. Restricted Cash:
As of March 31, 1998, the remaining net cash sales proceeds of
$1,025,248 from the sale of the two properties in Farmington Hills,
Michigan plus accrued interest of $19,177, were being held in an
interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property or to be used by the
Partnership for other Partnership purposes.
4. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding
gains and losses from the sale of properties, are allocated 99 percent
to the limited partners and one percent to the general partners.
Distributions of net cash flow are made 99 percent to the limited
partners and one percent to the general partners; provided, however,
that the one percent of net cash flow to be distributed to the general
partners is
6
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters Ended March 31, 1998 and 1997
4. Allocations and Distributions - Continued:
subordinated to receipt by the limited partners of an aggregate, ten
percent, noncumulative, noncompounded annual return on their adjusted
capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, to the
extent distributed, will be distributed first to the limited partners
in an amount sufficient to provide them with their cumulative 10%
Preferred Return, plus the return of their adjusted capital
contributions. The general partners will then receive, to the extent
previously subordinated and unpaid, a one percent interest in all prior
distributions of net cash flow and a return of their capital
contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general
partners. Any gain from the sale of a property is, in general,
allocated in the same manner as net sales proceeds are distributable.
Any loss from the sale of a property is, in general, allocated first on
a pro rata basis to partners with positive balances in their capital
accounts; and thereafter, 95 percent to the limited partners and five
percent to the general partners.
During the quarters ended March 31, 1998 and 1997, the Partnership
declared distributions to the limited partners of $1,747,628 and
$594,000, respectively. This represents distributions for the quarters
ended March 31, 1998 and 1997 of $34.95 and $11.88 per unit,
respectively. The distribution for the quarter ended March 31, 1998,
includes $1,232,003 as a result of the distribution of net sales
proceeds from the 1997 sale of the Properties in Avon Park, Florida and
Farmington Hill, Michigan. This amount was applied toward the limited
partners' 10% Preferred Return. No distributions have been made to the
general partners to date.
5. Related Party Transactions:
Certain affiliates are entitled to receive a deferred, subordinated
real estate disposition fee, payable upon the sale of one or more
properties based on the lesser of one-half of a competitive real estate
commission or three percent of a competitive real estate commission or
three percent of the sales price if the affiliates provide a
substantial amount of services in connection with the sale. Payment of
the real estate disposition fee is subordinated to receipt by the
limited partners of their aggregate ten percent preferred return, plus
their adjusted capital contributions. For the quarter ended March 31,
1998, the Partnership incurred $45,150
7
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters Ended March 31, 1998 and 1997
5. Related Party Transactions - Continued:
in deferred, subordinated, real estate disposition fees as a result of
the 1997 sales of properties in Avon Park, Florida and Farmington
Hills, Michigan. No deferred, subordinated, real estate disposition
fees were incurred for the quarter ended March 31, 1997.
8
<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 March 31, 1998,
the Partnership owned 38 Properties, including three Properties owned by joint
ventures in which the Partnership is a co-venturer and six Properties owned with
affiliates as tenants-in-common.
Liquidity and Capital Resources
During the quarters ended March 31, 1998 and 1997, the Partnership
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses)of $596,047 and $556,561, respectively. The increase in
cash from operations for the quarter ended March 31, 1998, as compared to the
quarter ended March 31, 1997, is primarily a result of changes in the
Partnership's working capital.
Other sources and uses of capital included the following during the
quarter ended March 31, 1998.
During the quarter ended March 31, 1998, the Partnership used net sales
proceeds from the 1997 sale of two Properties to acquire a Property in Overland
Park, Kansas, and a Property in Memphis, Tennessee, as tenants-in-common with
affiliates of the general partners. In connection therewith, the Partnership and
the affiliates entered into separate agreements whereby each co-venturer will
share in the profits and losses of each Property in proportion to their
applicable percentage interest. As of March 31, 1998, the Partnership owned a
39.42% and a 13.38% interest in the Property in Overland Park, Kansas and the
Property in Memphis, Tennessee, respectively.
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 March 31, 1998, the Partnership had $1,069,775
invested in such short-term investments, as compared to $470,194 at December 31,
1997. The increase in cash and cash equivalents during the quarter ended March
31, 1998, is primarily attributable to the release of the funds held in escrow
at December 31, 1997 relating to the sales of certain Properties during 1997.
The funds remaining at March 31, 1998, will be used towards the payment of
distributions and other liabilities.
9
<PAGE>
Liquidity and Capital Resources - Continued
Total liabilities of the Partnership, including distributions payable,
increased to $1,984,789 at March 31, 1998, from $757,410 at December 31, 1997.
The increase in liabilities for the quarter ended March 31, 1998 is primarily
due to the Partnership accruing a special distribution of net sales proceeds
totalling $1,232,003 from the 1997 sales of the Properties in Avon Park, Florida
and Farmington Hills, Michigan, payable to the limited partners at March 31,
1998. Liabilities at March 31, 1998, to the extent they exceed cash and cash
equivalents at March 31, 1998, will be paid from future cash from operations,
from cash held in escrow at March 31, 1998, 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.
Based on current and anticipated future cash from operations, and for
the quarter ended March 31, 1998, a portion of the proceeds received from the
1997 sales of the Properties as described above, and to a lesser extent, for the
quarter ended March 31, 1997, a loan received from the corporate general partner
in April 1997, the Partnership declared distributions to limited partners of
$1,747,628 and $594,000 for the quarters ended March 31, 1998 and 1997,
respectively. This represents distributions of $34.95 and $11.88 per unit for
the quarters ended March 31, 1998 and 1997, respectively. Distributions for the
quarter ended March 31, 1998 include $1,232,003 as a result of the distribution
of net sales proceeds from the 1997 sale of the Properties in Avon Park, Florida
and Farmington Hills, Michigan. As a result of the sale of the Properties, the
Partnership's total revenue was reduced, while the majority of the Partnership's
operating expenses remained fixed. Therefore, distributions of net cash flow
were adjusted for the quarter ended March 31, 1998 and are expected to remain at
this level. This special distribution was effectively a return of a portion of
the limited partners' investment, although, in accordance with the Partnership
agreement, it was applied to the limited partners' unpaid preferred return. No
distributions were made to the general partners for the quarters ended March 31,
1998 and 1997. No amounts distributed to the limited partners for the quarters
ended March 31, 1998 and 1997, 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.
10
<PAGE>
Results of Operations
During the quarter ended March 31, 1997, the Partnership owned and
leased 36 wholly owned Properties (including seven Properties sold in 1997), and
during the quarter ended March 31, 1998, the Partnership owned and leased 29
wholly owned Properties to operators of fast-food and family-style restaurant
chains. In connection therewith, during the quarters ended March 31, 1998 and
1997, the Partnership earned $432,820 and $526,860, respectively, in rental
income from these Properties. The decrease in rental income during the quarter
ended March 31, 1998, as compared to the quarter ended March 31, 1997 is
primarily attributable to a decrease in rental income as a result of the sales
of Properties during 1997 described above.
For the quarters ended March 31, 1998 and 1997, the Partnership also
owned and leased three 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, and in addition, for the quarter ended March 31, 1998, the Partnership
owned and leased five additional Properties as tenants-in-common with affiliates
of the general partners. In connection therewith, during the quarters ended
March 31, 1998 and 1997, the Partnership earned $109,416 and $259,857,
respectively, attributable to net income earned by these joint ventures. The
decrease 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. Show Low Joint
Venture reinvested the majority of the net sales proceeds in an additional
property in June 1997. The decrease in net income earned by joint ventures
during the quarter ended March 31, 1998, is partially offset by the fact that
subsequent to March 31, 1997, the Partnership reinvested the net sales proceeds
it received from the sale of five Properties during 1997, in five Properties
with affiliates of the general partners as tenants-in-common.
Operating expenses, including depreciation and amortization, were
$133,519 and $151,373 for the quarters ended March 31, 1998 and 1997,
respectively. The decrease in operating expenses during the quarter ended March
31, 1998, as compared to the quarter ended March 31, 1997, is primarily
attributable to a decrease in depreciation expense as a result of the sales of
several Properties during 1997, as described above.
11
<PAGE>
Results of Operations - Continued
During the quarter ended March 31, 1998, the Partnership recorded
deferred, subordinated real estate disposition fees payable to CNL Fund
Advisors, Inc. relating to the 1997 sales of the Properties in Avon Park,
Florida and Farmington Hills, Michigan. Initially, the Partnership was
considering reinvesting the sales proceeds in additional Properties and
therefore did not include these amounts in the determination of the gain on sale
for financial reporting purposes during 1997. However, during the quarter ended
March 31, 1998, the Partnership declared a special distribution of net sales
proceeds from these Properties, therefore, the Partnership recorded these
subordinated real estate disposition fees during the quarter ended March 31,
1998. The payment of these fees is subordinated to the limited partners
receiving their ten percent preferred return and their adjusted capital.
12
<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 March 31, 1998.
13
<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 14th day of May, 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 March 31, 1998, and its statement of income
for the three months then ended and is qualified in its entirety by reference to
the Form 10Q of CNL Income Fund II, Ltd. for the three months ended March 31,
1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,114,200<F2>
<SECURITIES> 0
<RECEIVABLES> 117,822
<ALLOWANCES> 80,816
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 16,466,663
<DEPRECIATION> 3,384,411
<TOTAL-ASSETS> 19,825,331
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,840,542
<TOTAL-LIABILITY-AND-EQUITY> 19,825,331
<SALES> 0
<TOTAL-REVENUES> 455,774
<CGS> 0
<TOTAL-COSTS> 133,519
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 386,521
<INCOME-TAX> 0
<INCOME-CONTINUING> 386,521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 386,521
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F2>Cash balance includes $1,044,425 in restricted cash.
<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 and
current liabilities.
</FN>
</TABLE>
