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, 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 of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 E. South Street
Orlando, Florida 32801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
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 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 9-13
Part II
Other Information 14
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- ------------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,549,043
and $3,302,095 $12,917,620 $13,164,568
Investment in joint ventures 4,360,442 3,568,155
Mortgage note receivable 28,731 42,734
Cash and cash equivalents 850,422 470,194
Restricted cash -- 2,470,175
Receivables, less allowance for doubtful
accounts of $70,868 and $83,254 57,717 80,577
Prepaid expenses 7,601 5,510
Lease costs, less accumulated amortization
of $14,156 and $11,520 6,407 9,043
Accrued rental income 168,738 148,103
----------------- -----------------
$18,397,678 $19,959,059
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 18,197 $ 7,170
Accrued and escrowed real estate
taxes payable 5,417 4,656
Distributions payable 515,625 594,000
Due to related parties 175,399 126,284
Rents paid in advance and deposits 26,975 25,300
----------------- -----------------
Total liabilities 741,613 757,410
Partners' capital 17,656,065 19,201,649
----------------- -----------------
$18,397,678 $19,959,059
================= =================
</TABLE>
See accompanying notes to 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,
1998 1997 1998 1997
---------- --------- ------------ -------------
<S> <C>
Revenues:
Rental income from operating
leases $450,831 $522,972 $1,321,975 $1,567,356
Contingent rental income 1,445 22,393 1,445 22,393
Interest and other income 17,361 17,521 60,100 34,466
---------- ---------- ------------ ------------
469,637 562,886 1,383,520 1,624,215
---------- ---------- ------------ ------------
Expenses:
General operating and
administrative 65,025 33,496 129,895 93,225
Bad debt expense -- -- -- 18,033
Professional services 5,119 3,557 30,759 13,907
Real estate taxes -- -- -- 1,259
State and other taxes -- -- 14,732 10,403
Depreciation and amortization 82,960 101,486 249,584 312,034
---------- ---------- ------------ ------------
153,104 138,539 424,970 448,861
---------- ---------- ------------ ------------
Income Before Equity in Earnings
of Joint Ventures, Gain on Sale of
Land and Buildings and Real Estate
Disposition Fees 316,533 424,347 958,550 1,175,354
Equity in Earnings of Joint Ventures 104,979 40,610 319,894 333,517
Gain on Sale of Land and Buildings -- 301,901 -- 460,152
Real Estate Disposition Fees -- -- (45,150 ) --
---------- ---------- ------------ ------------
Net Income $421,512 $766,858 $1,233,294 $1,969,023
========== ========== ============ ============
Allocation of Net Income:
General partners $ 4,214 $ 5,636 $ 12,783 $ 17,583
Limited partners 417,298 761,222 1,220,511 1,951,440
---------- ---------- ------------ ------------
$421,512 $766,858 $1,233,294 $1,969,023
========== ========== ============ ============
Net Income Per Limited Partner Unit $ 8.35 $ 15.22 $ 24.41 $ 39.03
========== ========== ============ ============
Weighted Average Number of Limited
Partner Units Outstanding 50,000 50,000 50,000 50,000
========== ========== ============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
---------------------------- ------------------
<S> <C>
General partners:
Beginning balance $ 373,111 $ 342,375
Net income 12,783 30,736
---------------- ---------------
385,894 373,111
---------------- ---------------
Limited partners:
Beginning balance 18,828,538 17,595,394
Net income 1,220,511 3,609,144
Distributions ($55.58 and
$47.52 per limited partner
unit, respectively) (2,778,878 ) (2,376,000 )
---------------- ---------------
17,270,171 18,828,538
---------------- ---------------
Total partners' capital $17,656,065 $19,201,649
================ ===============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
--------------- ---------------
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating Activities $ 1,601,005 $ 1,579,694
---------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of land and building -- 1,259,417
Additions to land and buildings on
operating leases -- (29,526 )
Return of capital from joint venture -- 124,440
Investment in joint ventures (834,888 ) --
Collections on mortgage note receivable 13,694 --
Decrease (increase) in restricted cash 2,457,670 (1,259,417 )
Payment of lease costs -- (4,507 )
---------------- ---------------
Net cash provided by investing
activities 1,636,476 90,407
---------------- ---------------
Cash Flows from Financing Activities:
Proceeds from loans from corporate
general partner -- 721,000
Repayment of loans from corporate
general partner -- (721,000 )
Distributions to limited partners (2,857,253 ) (1,782,000 )
---------------- ---------------
Net cash used in financing
activities (2,857,253 ) (1,782,000 )
---------------- ---------------
Net Increase (Decrease) in Cash and Cash
Equivalents 380,228 (111,899 )
Cash and Cash Equivalents at Beginning
of Period 470,194 318,756
---------------- ---------------
Cash and Cash Equivalents at End of
Period $ 850,422 $ 206,857
================ ===============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
--------------- ----------------
<S> <C>
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage note accepted in exchange
for sale of land and building $ -- $ 42,000
=============== ===============
Deferred real estate disposition fees
incurred and unpaid at end of
period $ 45,150 $ --
=============== ===============
Distributions declared and unpaid at
end of period $ 515,625 $ 594,000
=============== ===============
</TABLE>
See accompanying notes to 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, 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 and nine months ended September 30, 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.
In May 1998, the Financial Accounting Standards Board reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the
Interim Financial Periods." The adoption of this consensus did not have
a material effect on the Partnership's financial position or results of
operations.
2. Investment in Joint Ventures:
In January 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.
6
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 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 and
properties held as tenants-in-common at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------------- ---------------
<S> <C>
Land and buildings on
operating leases, less
accumulated depreciation $8,457,326 $7,091,781
Net investment in direct
financing leases 2,123,134 518,399
Cash 37,273 56,815
Receivables 84 4,685
Accrued rental income 183,483 102,913
Other assets 1,056 418
Liabilities 38,145 31,673
Partners' capital 10,764,211 7,743,338
Revenues 938,768 399,579
Gain on sale of land and
building -- 360,002
Net income 780,857 687,021
</TABLE>
The Partnership recognized income totalling $319,894 and $333,517 for
the nine months ended September 30, 1998 and 1997, respectively, from
these joint ventures, $104,979 and $40,610 of which was earned for the
quarters ended September 30, 1998 and 1997, respectively.
3. 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 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").
7
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
3. Allocations and Distributions - Continued:
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 nine months ended September 30, 1998 and 1997, the
Partnership declared distributions to the limited partners of
$2,778,878 and $1,782,000, respectively ($515,625 and $594,000 for each
of the quarters ended September 30, 1998 and 1997, respectively). This
represents distributions of $55.58 and $35.64 per unit for the nine
months ended September 30, 1998 and 1997, respectively ($10.31 and
$11.88 per unit for each of the quarters ended September 30, 1998 and
1997, respectively). Distributions for the nine months ended September
30, 1998, included $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. This amount was applied toward
the limited partners' 10% Preferred Return. No distributions have been
made to the general partners to date.
4. Related Party Transactions:
An affiliate of the Partnership is entitled to receive a deferred,
subordinated real estate disposition fee, payable upon the sale of one
or more properties based on the lesser of one-half of a competitive
real estate commission or three percent of the sales price if the
affiliate provides 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 10% Preferred
Return, plus their adjusted capital contributions. For the nine months
ended September 30, 1998, the Partnership incurred $45,150 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 nine months ended September 30, 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 September 30,
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 nine months ended September 30, 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 $1,601,005 and $1,579,694,
respectively. The increase in cash from operations for the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997, is
primarily a result of changes in the Partnership's working capital.
Other sources and uses of capital included the following during the
nine months ended September 30, 1998.
During January 1998, the Partnership used a portion of the 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 its applicable
percentage interest. As of September 30, 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 September 30, 1998, the Partnership had
$850,422 invested in such short-term investments, as compared to $470,194 at
December 31, 1997. The increase in cash and cash equivalents during the nine
months ended September 30, 1998, is primarily attributable to the release of
funds held in escrow at December 31, 1997 relating to the sales of certain
Properties during 1997. The funds remaining at September 30, 1998, after payment
of distributions and other liabilities, will be used to meet the Partnership's
working capital and other needs.
Total liabilities of the Partnership, including distributions payable,
decreased to $741,613 at September 30, 1998, from $757,410 at December 31, 1997.
The general partners believe that the Partnership has sufficient cash on hand to
meet its current working capital needs.
9
<PAGE>
Liquidity and Capital Resources - Continued
Based on (i) current and anticipated future cash from operations, (ii)
for the nine months ended September 30, 1998, a portion of the proceeds received
from the 1997 sales of the Properties as described above, and (iii) for the nine
months ended September 30, 1997, the $214,000 in termination fees received in
conjunction with the sale of the two Properties in Farmington Hills, Michigan,
in October 1997, the Partnership declared distributions to the limited partners
of $2,778,878 and $1,782,000 for the nine months ended September 30, 1998 and
1997, respectively ($515,625 and $594,000 for the quarters ended September 30,
1998 and 1997, respectively). This represents distributions for the applicable
nine months of $55.58 and $35.64 per unit, respectively ($10.31 and $11.88 for
the quarters ended September 30, 1998 and 1997, respectively). Distributions for
the nine months ended September 30, 1998 included $1,232,003 as a result of the
distribution of the majority of the net sales proceeds from the 1997 sale of the
Properties in Avon Park, Florida and Farmington Hills, Michigan. 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. 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 nine months ended September
30, 1998. No distributions were made to the general partners for the quarters
and nine months ended September 30, 1998 and 1997. No amounts distributed to the
limited partners for the nine months ended September 30, 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 general partners have been informed by CNL American Properties
Fund, Inc. ("APF"), an affiliate of the general partners, that it intends to
significantly increase its asset base by proposing to acquire affiliates of the
general partners which have similar restaurant property portfolios, including
the Partnership. APF is a real estate investment trust whose primary business is
the ownership of restaurant properties leased on a long-term, "triple-net" basis
to operators of national and regional restaurant chains. Accordingly, the
general partners anticipate that APF will make an offer to acquire the
Partnership in exchange for securities of APF. The general partners have
recently retained financial and legal advisors to assist them in evaluating and
negotiating any offer that may be proposed by APF. However, at this time, APF
has made no such offer. In the event that an offer is made, the general partners
will evaluate it and if the general partners believe that the offer is worth
pursuing, the general partners will promptly inform the limited partners. Any
agreement to sell the Partnership would be subject to the approval of the
limited partners in accordance with the terms of the partnership agreement.
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 nine months ended September 30, 1997, the Partnership owned
and leased 36 wholly owned Properties (including seven Properties sold in 1997),
and during the nine months ended September 30, 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 nine months ended
September 30, 1998 and 1997, the Partnership earned $1,323,420 and $1,589,749,
respectively, in rental income and contingent rental income from these
Properties, $452,276 and $545,365 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The decrease in rental income and
contingent rental income during the quarter and nine months ended September 30,
1998, as compared to the quarter and nine months ended September 30, 1997 is
primarily attributable to a decrease in rental income and contingent rental
income as a result of the sales of seven Properties during 1997. The Partnership
reinvested the majority of the net sales proceeds from the 1997 sales of several
Properties in Properties held as tenants-in-common with affiliates of the
general partners resulting in an increase in equity in earnings of joint
ventures, as described below. Rental income and contingent rental income are
expected to remain at reduced amounts as a result of the Partnership
distributing the majority of the net sales proceeds from the 1997 sales of the
Properties in Avon Park, Florida and Farmington Hills, Michigan.
In addition, during the nine months ended September 30, 1998 and 1997,
the Partnership earned $60,100 and $34,466, respectively in interest and other
income, $17,361 and $17,521 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The increase in interest and other
income for the nine months ended September 30, 1998 is primarily due to an
increase in interest income earned on net sales proceeds relating to the sales
of several properties during 1997 described above, pending the reinvestment of
the net sales proceeds in additional Properties and distributions to limited
partners.
For the nine months ended September 30, 1997, the Partnership also
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 addition, for the nine months ended September 30, 1998, the
Partnership owned and leased three Properties indirectly through joint venture
arrangements and six Properties as tenants-in-common with affiliates of the
general partners. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Partnership earned $319,894 and $333,517,
respectively, attributable to net income earned by these joint ventures,
$104,979 and $40,610 of which was earned during the quarters ended September 30,
1998 and 1997, respectively. The decrease in net income earned by joint ventures
for the nine months ended September 30, 1998, 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 nine months ended September 30, 1998, is partially offset by, and the
increase in net income earned by joint ventures during the quarter ended
September 30, 1998 is primarily attributable to, the fact that subsequent to
September 30, 1997, the Partnership reinvested the net sales proceeds from the
sale of five Properties during 1997, in five Properties with affiliates of the
general partners as tenants-in-common.
11
<PAGE>
Results of Operations - Continued
Operating expenses, including depreciation and amortization, were
$424,970 and $448,861 for the nine months ended September 30, 1998 and 1997,
respectively, of which $153,104 and $138,539 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. Depreciation expense during the
quarter and nine months ended September 30, 1998, decreased, as compared to the
same periods in 1997, primarily as a result of the sales of several Properties
during 1997. General operating and administrative expenses increased during the
quarter and nine months ended September 30, 1998, primarily due to the
Partnership incurring roof repairs relating to the Property in Lombard,
Illinois. The Partnership has entered into a new lease for this Property and
does not anticipate incurring such expenses in future periods.
During the nine months ended September 30, 1998, the Partnership
recorded deferred, subordinated real estate disposition fees of $45,150 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
considered 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 nine months ended
September 30, 1998, the Partnership declared a special distribution of net sales
proceeds from these Properties payable to the limited partners. Accordingly, the
Partnership recorded these subordinated real estate disposition fees during the
nine months ended September 30, 1998. The payment of these fees is subordinated
to the limited partners receiving their ten percent preferred return and their
adjusted capital.
As a result of the sales of the Properties in Eagan, Minnesota and
Jacksonville, Florida, during 1997, the Partnership recognized gains 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, 1998.
In May 1998, the Financial Accounting Standards Board reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the Interim
Financial Periods." The adoption of this consensus did not have a material
effect on the Partnership's financial position or results of operations.
The Year 2000 problem is the result of information technology systems
and embedded systems (products which are made with microprocessor (computer)
chips such as HVAC systems, physical security systems and elevators) using a
two-digit format, as opposed to four digits, to indicate the year. Such
information technology and embedded systems may be unable to properly recognize
and process date-sensitive information beginning January 1, 2000.
The Partnership does not have any information technology systems.
Affiliates of the general partners provide all services requiring the use of
information technology systems pursuant to a management agreement with the
Partnership. The maintenance of embedded systems, if any, at the Partnership's
properties is the responsibility of the tenants of the properties in accordance
with the terms of the Partnership's leases. The general partners and affiliates
have established a team dedicated to reviewing the internal information
technology systems used in the operation of
12
<PAGE>
Results of Operations - Continued
the Partnership, and the information technology and embedded systems and the
Year 2000 compliance plans of the Partnership's tenants, significant suppliers,
financial institutions and transfer agent.
The information technology infrastructure of the affiliates of the
general partners consists of a network of personal computers and servers that
were obtained from major suppliers. The affiliates utilize various
administrative and financial software applications on that infrastructure to
perform the business functions of the Partnership. The inability of the general
partners and affiliates to identify and timely correct material Year 2000
deficiencies in the software and/or infrastructure could result in an
interruption in, or failure of, certain of the Partnership's business activities
or operations. Accordingly, the general partners and affiliates have requested
and are evaluating documentation from the suppliers of the affiliates regarding
the Year 2000 compliance of their products that are used in the business
activities or operations of the Partnership. The costs expected to be incurred
by the general partners and affiliates to become Year 2000 compliant will be
incurred by the general partners and affiliates; therefore, these costs will
have no impact on the Partnership's financial position or results of operations.
The Partnership has material third party relationships with its
tenants, financial institutions and transfer agent. The Partnership depends on
its tenants for rents and cash flows, its financial institutions for
availability of cash and its transfer agent to maintain and track investor
information. If any of these third parties are unable to meet their obligations
to the Partnership because of the Year 2000 deficiencies, such a failure may
have a material impact on the Partnership. Accordingly, the general partners
have requested and are evaluating documentation from the Partnership's tenants,
financial institutions, and transfer agent relating to their Year 2000
compliance plans. At this time, the general partners have not yet received
sufficient certifications to be assured that the tenants, financial
institutions, and transfer agent have fully considered and mitigated any
potential material impact of the Year 2000 deficiencies. Therefore, the general
partners do not, at this time, know of the potential costs to the Partnership of
any adverse impact or effect of any Year 2000 deficiencies by these third
parties.
The general partners currently expect that all year 2000 compliance
testing and any necessary remedial measures on the information technology
systems used in the business activities and operations of the Partnership will
be completed prior to June 30, 1999. Based on the progress the general partners
and affiliates have made in identifying and addressing the Partnership's Year
2000 issues and the plan and timeline to complete the compliance program, the
general partners do not foresee significant risks associated with the
Partnership's Year 2000 compliance at this time. Because the general partners
and affiliates are still evaluating the status of the systems used in business
activities and operations of the Partnership and the systems of the third
parties with which the Partnership conducts its business, the general partners
have not yet developed a comprehensive contingency plan and are unable to
identify "the most reasonably likely worst case scenario" at this time. As the
general partners identify significant risks related to the Partnership's Year
2000 compliance or if the Partnership's Year 2000 compliance program's progress
deviates substantially from the anticipated timeline, the general partners will
develop appropriate contingency plans.
13
<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, 1998.
14
<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, 1998.
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)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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, 1998, 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, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1988
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 850,422
<SECURITIES> 0
<RECEIVABLES> 128,585
<ALLOWANCES> 70,868
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 16,466,663
<DEPRECIATION> 3,549,043
<TOTAL-ASSETS> 18,397,678
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,656,065
<TOTAL-LIABILITY-AND-EQUITY> 18,397,678
<SALES> 0
<TOTAL-REVENUES> 1,383,520
<CGS> 0
<TOTAL-COSTS> 424,970
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,233,294
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,233,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,233,294
<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>
