<PAGE>
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, 1999
---------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the transition period from _______________________ to ______________________
Commission file number
0-16824
---------------------------------------
CNL Income Fund II, Ltd.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2733859
- ------------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
- ------------------------------------ -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 540-2000
-----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ------
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CONTENTS
Page
----
Part I.
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Part II.
Other Information 16-18
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- -------------------
ASSETS
------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss
on building $ 12,025,550 $ 12,835,304
Investment in joint ventures 4,324,638 4,353,427
Mortgage note receivable -- 6,872
Cash and cash equivalents 1,514,111 889,891
Receivables, less allowance for doubtful accounts
of $57,806 and $55,435, in 1999 and 1998,
respectively 13,936 122,560
Prepaid expenses 7,899 4,801
Lease costs, less accumulated amortization of
$17,085 and $14,889 in 1999 and 1998,
respectively 3,478 5,674
Accrued rental income 191,126 174,382
------------------- -------------------
$ 18,080,738 $ 18,392,911
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 105,760 $ 4,621
Escrowed real estate taxes payable 5,187 8,065
Distributions payable 515,629 515,629
Due to related parties 55,458 183,303
Rents paid in advance and deposits 32,976 40,412
------------------- -------------------
Total liabilities 715,010 752,030
Commitments and Contingencies (Note 4)
Partners' capital 17,365,728 17,640,881
------------------- -------------------
$ 18,080,738 $ 18,392,911
=================== ===================
</TABLE>
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,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases $434,173 $452,276 $1,291,816 $1,323,420
Interest and other income 17,541 17,361 53,413 60,100
------------- ------------- ------------- -------------
451,714 469,637 1,345,229 1,383,520
------------- ------------- ------------- -------------
Expenses:
General operating and administrative 28,650 65,025 89,031 129,895
Professional services 11,571 5,119 28,555 30,759
State and other taxes -- -- 15,711 14,732
Depreciation and amortization 81,643 82,960 246,228 249,584
Transaction costs 41,555 -- 130,077 --
------------- ------------- ------------- -------------
163,419 153,104 509,602 424,970
------------- ------------- ------------- -------------
Income Before Equity in Earnings of Joint Ventures,
Gain on Sale of Land and Building, Provision for
Loss on Building, and Real Estate Disposition
Fees 288,295 316,533 835,627 958,550
Equity in Earnings of Joint Ventures 108,177 104,979 322,940 319,894
Gain on Sale of Land and Building -- -- 192,752 --
Provision for Loss on Building (79,585) -- (79,585) --
Real Estate Disposition Fees -- -- -- (45,150)
------------- ------------- ------------- -------------
Net Income $316,887 $421,512 $1,271,734 $1,233,294
============= ============= ============= =============
Allocation of Net Income:
General partners $ 2,372 $ 4,214 $ 10,611 $ 12,783
Limited partners 314,515 417,298 1,261,123 1,220,511
------------- ------------- ------------- -------------
$316,887 $421,512 $1,271,734 $1,233,294
============= ============= ============= =============
Net Income Per Limited Partner Unit $ 6.29 $ 8.35 $ 25.22 $ 24.41
============= ============= ============= =============
Weighted Average Number of Limited Partner
Units Outstanding 50,000 50,000 50,000 50,000
============= ============= ============= =============
</TABLE>
2
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CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Nine Months Ended Year Ended
September 30, December 31,
1999 1998
--------------- --------------
General partners:
Beginning balance $ 390,900 $ 373,111
Net income 10,611 17,789
--------------- --------------
401,511 390,900
--------------- --------------
Limited partners:
Beginning balance 17,249,981 18,828,538
Net income 1,261,123 1,715,950
Distributions ($30.94 and $65.89 per
limited partner unit, respectively) (1,546,887) (3,294,507)
--------------- --------------
16,964,217 17,249,981
--------------- --------------
Total partners' capital $ 17,365,728 $ 17,640,881
=============== ==============
3
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CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
--------------- ----------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 1,486,612 $ 1,601,005
--------------- ----------------
Cash Flows from Investing Activities:
Proceeds from sale of land and building 677,678 --
Investment in joint ventures -- (834,888)
Collections on mortgage note receivable 6,817 13,694
Decrease in restricted cash -- 2,457,670
--------------- ----------------
Net cash provided by investing activities 684,495 1,636,476
--------------- ----------------
Cash Flows from Financing Activities:
Distributions to limited partners (1,546,887) (2,857,253)
--------------- ----------------
Net cash used in financing activities (1,546,887) (2,857,253)
--------------- ----------------
Net Increase in Cash and Cash Equivalents 624,220 380,228
Cash and Cash Equivalents at Beginning of Period 889,891 470,194
--------------- ----------------
Cash and Cash Equivalents at End of Period $ 1,514,111 $ 850,422
=============== ===============
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Deferred real estate disposition fees incurred
and unpaid at end of period $ -- $ 45,150
=============== ==============
Distributions declared and unpaid at end of
period $ 515,629 $ 515,625
=============== ==============
</TABLE>
4
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CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
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, 1999 may not be
indicative of the results that may be expected for the year ending
December 31, 1999. Amounts as of December 31, 1998, 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, 1998.
Certain items in the prior year's financial statements have been
reclassified to conform to 1999 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Land and Buildings on Operating Leases:
--------------------------------------
Land and buildings on operating leases consisted of the following at:
September 30, December 31,
1999 1998
---------------- ----------------
Land $ 6,223,488 $ 6,608,400
Buildings 9,695,098 9,858,263
--------------- ---------------
15,918,586 16,466,663
Less accumulated
depreciation (3,813,451) (3,631,359)
--------------- ---------------
12,105,135 12,835,304
Less allowance for
loss on building (79,585) --
--------------- ---------------
$ 12,025,550 $ 12,835,304
=============== ===============
5
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CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
2. Land and Buildings on Operating Leases - Continued:
--------------------------------------------------
In March 1999, the Partnership sold its property in Columbia, Missouri
to a third party for $682,500 and received net sales proceeds of
$677,678, resulting in a gain of $192,752 for financial reporting
purposes. This property was originally acquired by the Partnership in
November 1987 and had a cost of approximately $511,200, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $166,500 in excess of
its original purchase price.
In addition, during the nine months ended September 30, 1999, the
Partnership recorded a provision for loss on building of $79,585
relating to the property in Littleton, Colorado. The allowance
represents the difference between the carrying value of the property at
September 30, 1999, and the estimated net sales proceeds from the sale
of the property based on a sales contract with an unrelated third party
(see Note 5).
3. Related Party Transactions:
--------------------------
On September 1, 1999, CNL American Properties Fund, Inc. ("APF"), an
affiliate of the general partners, acquired CNL Fund Advisors, Inc.
("CFA"), an affiliate who provides certain services relating to
management of the Partnership and its properties pursuant to a property
management agreement with the Partnership. As a result of this
acquisition, CFA became a wholly owned subsidiary of APF; however, the
terms of the property management agreement between the Partnership and
CFA remain unchanged and in effect.
4. Commitments and Contingencies:
-----------------------------
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to
which the Partnership would be merged with and into a subsidiary of APF
(the "Merger"). As consideration for the Merger, APF has agreed to
issue 1,196,634 shares of its common stock, par value $0.01 per share
(the "APF Shares"). In order to assist the general partners in
evaluating the proposed merger consideration, the general partners
retained Valuation Associates, a nationally recognized real estate
appraisal firm, to appraise the Partnership's restaurant property
portfolio. Based on Valuation Associates' appraisal, the fair value of
the Partnership's property portfolio and other assets was $23,548,652
as of December 31, 1998. The APF Shares are expected to be listed for
trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and therefore, would be
6
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CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
4. Commitments and Contingencies - Continued:
-----------------------------------------
freely tradeable at the option of the former limited partners. At a
special meeting of the partners that is expected to be held in the
first quarter of 2000, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve
the Merger prior to consummation of the transaction. If the limited
partners at the special meeting approve the Merger, APF will own the
properties and other assets of the Partnership. The general partners
intend to recommend that the limited partners of the Partnership
approve the Merger. In connection with their recommendation, the
general partners will solicit the consent of the limited partners at
the special meeting. If the limited partners reject the Merger, the
Partnership will bear the portion of the transaction costs based upon
the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in
connection with the proposed Merger. On July 8, 1999, the plaintiffs
amended the complaint to add three additional limited partners as
plaintiffs. Additionally, on June 22, 1999, a limited partner in
certain of the CNL Income Funds served a lawsuit against the general
partners, APF, CNL Fund Advisors, Inc. and certain of its affiliates in
connection with the proposed Merger. On September 23, 1999, the judge
assigned to the two lawsuits entered an order consolidating the two
cases. Pursuant to this order, the plaintiffs in these cases filed a
consolidated and amended complaint on November 8, 1999. The various
defendants, including the general partners, have 45 days to respond to
that consolidated complaint. The general partners and APF believe that
the lawsuits are without merit and intend to defend vigorously against
the claims. See Part II - Item 1. Legal Proceedings.
5. Subsequent Event:
----------------
In November 1999, the Partnership sold its property in Littleton,
Colorado, for $150,000 and received net sales proceeds of $148,437,
resulting in a loss of $79,585 for financial reporting purposes which
the Partnership recorded at September 30, 1999 (see Note 2).
7
<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,
1999, the Partnership owned 37 Properties, which included interests in three
Properties owned by joint ventures in which the Partnership is a co-venturer and
six Properties owned with affiliates of the general partners as
tenants-in-common.
Capital Resources
- -----------------
During the nine months ended September 30, 1999 and 1998, 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 $1,486,612 and $1,601,005, respectively. The decrease
in cash from operations for the nine months ended September 30, 1999, as
compared to the nine months ended September 30, 1998, is primarily a result of
changes in income and expenses as described in "Results of Operations" below.
Other sources and uses of capital included the following during the nine
months ended September 30, 1999.
In March 1999, the Partnership sold its Property in Columbia, Missouri for
$682,500 and received net sales proceeds of $677,678, resulting in a gain of
$192,752 for financial reporting purposes. This Property was originally acquired
by the Partnership in November 1987 and had a cost of approximately $511,200,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the Property for approximately $166,500 in excess of its
original purchase price. The Partnership intends to reinvest the net sales
proceeds in an additional Property. The Partnership 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.
In November 1999, the Partnership sold its Property in Littleton, Colorado,
for $150,000 and received net sales proceeds of $148,437, resulting in a loss of
$79,585 for financial reporting purposes, which the Partnership recorded at
September 30, 1999, as described below in "Results of Operations". The
Partnership intends to reinvest the net sales proceeds from the sale of this
Property in an additional Property.
Currently, rental income from the Partnership's Properties and net sales
proceeds from the sale of a Property pending reinvestment in an additional
Property, are invested in money market accounts or other short-term, highly
liquid investments such as demand deposit accounts at commercial banks,
certificates of deposit, and money market accounts with less than a 30-day
maturity date, pending the Partnership's use of such funds to pay Partnership
expenses or to make distributions to the partners. At September 30, 1999, the
Partnership had $1,514,111 invested in such short-term investments, as compared
to $889,891 at December 31, 1998. The
8
<PAGE>
increase in cash and cash equivalents during the nine months ended September 30,
1999, is primarily due to the receipt of $677,678 in net sales proceeds from the
sale of the Property in Columbia, Missouri as described above. The funds
remaining at September 30, 1999, after payment of distributions and other
liabilities, will be used to invest in an additional Property and to meet the
Partnership's working capital and other needs.
Short-Term Liquidity
- --------------------
The Partnership's short-term liquidity requirements consist primarily of
the operating expenses of the Partnership.
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.
The Partnership generally distributes cash from operations remaining after
the payment of operating expenses of the Partnership, to the extent that the
general partners determine that such funds are available for distribution. Based
on current and anticipated future cash from operations, and for the nine months
ended September 30, 1998, a portion of the proceeds received from the 1997 sales
of two Properties in Avon Park, Florida and Farmington Hills, Michigan, the
Partnership declared distributions to limited partners of $1,546,887 and
$2,778,878 for the nine months ended September 30, 1999 and 1998, respectively
($515,629 and $515,625 for the quarters ended September 30, 1999 and 1998,
respectively). This represents distributions of $30.94 and $55.58 for the nine
months ended September 30, 1999 and 1998, respectively ($10.31 for each of the
quarters ended September 30, 1999 and 1998). 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 sales of the Properties in
Avon Park, Florida and Farmington Hills, Michigan. No distributions were made to
the general partners for the quarters and nine months ended September 30, 1999
and 1998. No amounts distributed to the limited partners for the nine months
ended September 30, 1999 and 1998 are required to be or have been treated by the
Partnership as a return of capital for purposes of calculating the limited
partners' return on their adjusted capital contributions. The Partnership
intends to continue to make distributions of cash available for distribution to
the limited partners on a quarterly basis.
Total liabilities of the Partnership, including distributions payable,
decreased to $715,010 at September 30, 1999, from $752,030 at December 31, 1998.
The decrease in liabilities at September 30, 1999, as compared to December 31,
1998, is primarily due to a decrease in amounts due to related parties at
September 30, 1999. The decrease was partially offset by the fact that the
Partnership accrued transaction costs relating to the proposed merger with CNL
American Properties Fund, Inc. ("APF"), as described below. The general partners
believe the Partnership has sufficient cash on hand to meet its current working
capital needs.
9
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Long-Term Liquidity
- -------------------
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
- --------------------
During the nine months ended September 30, 1999 and 1998, the Partnership
owned and leased 29 wholly owned Properties (which included one Property in
Columbia, Missouri which was sold in March 1999), to operators of fast-food and
family-style restaurant chains. In connection therewith, during the nine months
ended September 30, 1999 and 1998, the Partnership earned $1,291,816 and
$1,323,420, respectively, in rental and contingent rental income from these
Properties, $434,173 and $452,276 of which was earned during the quarters ended
September 30, 1999 and 1998, respectively. Rental income decreased during the
nine months ended September 30, 1999, as compared to the nine months ended
September 30, 1998, primarily as a result of the sale of the Property in
Columbia, Missouri, as described above in "Capital Resources."
During the nine months ended September 30, 1999 and 1998, the Partnership
also 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, 1999 and 1998, the Partnership earned $322,940 and $319,894,
respectively, attributable to net income earned by these joint ventures,
$108,177 and $104,979 of which was earned during the quarters ended September
30, 1999 and 1998, respectively.
Operating expenses, including depreciation and amortization, were $509,602
and $424,970 for the nine months ended September 30, 1999 and 1998,
respectively, of which $163,419 and $153,104 were incurred during the quarters
ended September 30, 1999 and 1998, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1999, as
compared to the quarter and nine months ended September 30, 1998, was primarily
due to the Partnership incurring $41,555 and $130,077 in transaction costs
during the quarter and nine months ended September 30, 1999, respectively,
relating to the general partners retaining financial and legal advisors to
assist them in evaluating and negotiating the proposed Merger with APF, as
described below. If the limited partners reject the Merger, the Partnership will
bear the portion of the transaction costs based upon the percentage of "For"
votes and the general partners will bear the portion of such transaction costs
based upon the percentage of "Against" votes and abstentions.
The increase in operating expenses was partially offset by the fact that
during the quarter and nine months ended September 30, 1998, the Partnership
incurred roof repairs relating to the Property in Lombard, Illinois. No such
expenses were incurred during the quarter and nine months ended September 30,
1999. The Partnership has entered into a new lease for this Property and does
not anticipate incurring such expenses for this Property 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
10
<PAGE>
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 as
described above in "Capital Resources". 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 cumulative 10 percent preferred return and their
adjusted capital contribution. No such fees were recorded during the nine months
ended September 30, 1999.
As a result of the sale of the Property in Columbia, Missouri, as described
above in "Capital Resources," the Partnership recognized a gain of $192,752 for
financial reporting purposes during the nine months ended September 30, 1999. No
Properties were sold during the nine months ended September 30, 1998.
At September 30, 1999, the Partnership recorded a provision for loss on
building in the amount of $79,585 for financial reporting purposes relating to
the Property in Littleton, Colorado. The allowance represents the difference
between the carrying value of the Property at September 30, 1999, and the
estimated net sales proceeds from the sale of the Property based on a sales
contract with an unrelated third party.
Proposed Merger
- ---------------
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with APF, pursuant to which the Partnership would be merged with and into
a subsidiary of APF (the "Merger"). As consideration for the Merger, APF has
agreed to issue 1,196,634 shares of its common stock, par value $0.01 per share
(the "APF Shares"). In order to assist the general partners in evaluating the
proposed merger consideration, the general partners retained Valuation
Associates, a nationally recognized real estate appraisal firm, to appraise the
Partnership's restaurant property portfolio. Based on Valuation Associates'
appraisal, the fair value of the Partnership's property portfolio and other
assets was $23,548,652 as of December 31, 1998. The APF Shares are expected to
be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners that
is expected to be held in the first quarter of 2000, limited partners holding in
excess of 50% of the Partnership's outstanding limited partnership interests
must approve the Merger prior to consummation of the transaction. If the limited
partners at the special meeting approve the Merger, APF will own the Properties
and other assets of the Partnership. The general partners intend to recommend
that the limited partners of the Partnership approve the Merger. In connection
with their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds served
a lawsuit against the general partners and APF in connection with the proposed
Merger. On July 8, 1999, the plaintiffs amended the complaint to add three
additional limited partners as plaintiffs. Additionally, on June 22, 1999, a
limited partner in certain of the CNL Income Funds served a lawsuit against the
general partners, APF, CNL Fund Advisors, Inc. and certain of its affiliates in
11
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connection with the proposed Merger. On September 23, 1999, the judge assigned
to the two lawsuits entered an order consolidating the two cases. Pursuant to
this order, the plaintiffs in these cases filed a consolidated and amended
complaint on November 8, 1999. The various defendants, including the general
partners, have 45 days to respond to that consolidated complaint. The general
partners and APF believe that the lawsuits are without merit and intend to
defend vigorously against the claims. See Part II - Item 1. Legal Proceedings.
Year 2000 Readiness Disclosure
- ------------------------------
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and
non-information technology systems to properly recognize and process date
sensitive information beyond January 1, 2000. The failure to accurately
recognize the year 2000 could result in a variety of problems from data
miscalculations to the failure of entire systems.
Information and Non-Information Technology Systems
The Partnership does not have any information or non-information technology
systems. The general partners and their affiliates provide all services
requiring the use of information and non-information technology systems pursuant
to a management agreement with the Partnership. The information technology
system of the general partners' affiliates consists of a network of personal
computers and servers built using hardware and software from mainstream
suppliers. The non-information technology systems of the affiliates are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers. The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.
The Y2K Team
In early 1998, the general partners and their affiliates formed a Year 2000
committee (the "Y2K Team") for the purpose of identifying, understanding and
addressing the various issues associated with the year 2000 problem. The Y2K
Team consists of the general partners and members from their affiliates,
including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consisted of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections, interviews
and tests to identify which of the systems used by the Partnership could have a
potential year 2000 problem.
The information system of the general partners' affiliates is comprised of
hardware and software applications from mainstream suppliers. Accordingly, the
Y2K Team has contacted and is evaluating documentation from the respective
vendors and manufacturers to verify the
12
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year 2000 compliance of their products. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of the affiliates.
In addition, the Y2K Team has requested and is evaluating documentation
from other companies with which the Partnership has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Partnership's transfer
agent and financial institutions. The Partnership depends on its transfer agent
to maintain and track investor information and its financial institutions for
availability of cash.
As of September 30, 1999, the Y2K Team had received responses from
approximately 62 percent of the third parties. All of the responses were in
writing. Of the third parties responding, all indicated that they are currently
year 2000 compliant or will be year 2000 compliant prior to the year 2000.
Although the Y2K Team continues to receive positive responses from the companies
with which the Partnership has third party relationships regarding their year
2000 compliance, the general partners cannot be assured that the third parties
have adequately considered the impact of the year 2000.
In addition, the Y2K Team has requested documentation from the
Partnership's tenants. As of September 30, 1999, the Y2K Team had received
responses from approximately 60 percent of the tenants. All of the responses
were in writing. Of the tenant's responding, all indicated that they are
currently year 2000 compliant or will be year 2000 compliant prior to the year
2000. The general partners cannot be assured that the tenants have adequately
considered the impact of the year 2000. The Partnership has also instituted a
policy of requiring any new tenants to indicate that their systems are year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and completed upgrades for its hardware
equipment that was not year 2000 compliant. In addition, the Y2K Team has
identified and completed upgrades of the software applications that were not
year 2000 compliant, although the general partners cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of the general partners and their affiliates. The general
partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.
Assessing the Risks to the Partnership of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Partnership
The general partners believe that the reasonably likely worst case scenario
with regard to the information and non-information technology systems used by
the Partnership is the failure of one or more of these systems as a result of
year 2000 problems. Because the Partnership's major source of income is rental
payments under long-term triple-net leases, any failure of information
13
<PAGE>
or non-information technology systems used by the Partnership is not expected to
have a material impact on the results of operations of the Partnership. Even if
such systems failed, the payment of rent under the Partnership's leases would
not be affected. In addition, the Y2K Team is expected to correct any Y2K
problems within the control of the general partners and their affiliates before
the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional risks
associated with the year 2000 compliance of the information or non-information
technology systems used by the Partnership, the Y2K Team will develop a
contingency plan if deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Partnership Records
The general partners believe that the reasonably likely worst case scenario
with regard to the Partnership's transfer agent is that the transfer agent will
fail to achieve year 2000 compliance of its systems and will not be able to
accurately maintain the records of the Partnership. This could result in the
inability of the Partnership to accurately identify its limited partners for
purposes of distributions, delivery of disclosure materials and transfer of
units. The Y2K Team has received certification from the Partnership's transfer
agent of its year 2000 compliance. Despite the positive response from the
transfer agent, the general partners cannot be assured that the transfer agent
has addressed all possible year 2000 issues.
The Y2K Team has developed a contingency plan pursuant to which the general
partners and their affiliates would maintain the records of the Partnership
manually, in the event that the systems of the transfer agent are not year 2000
compliant. The general partners and their affiliates would have to allocate
resources to internally perform the functions of the transfer agent. The general
partners do not anticipate that the additional cost of these resources would
have a material impact on the results of operations of the Partnership.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
The general partners believe that the reasonably likely worst case scenario
with regard to the Partnership's financial institutions is that some or all of
its funds on deposit with such financial institutions may be temporarily
unavailable. The Y2K Team has received responses from 93% of the Partnership's
financial institutions indicating that their systems are currently year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Despite the positive responses from the financial institutions, the general
partners cannot be assured that the financial institutions have addressed all
possible year 2000 issues. The loss of short-term liquidity could affect the
Partnership's ability to pay its expenses on a current basis. The general
partners do not anticipate that a loss of short-term liquidity would have a
material impact on the results of operations of the Partnership.
Based upon the responses received from the Partnership's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
14
<PAGE>
Risks of Late Payment or Non-Payment of Rent by Tenants
The general partners believe that the reasonably likely worst case scenario
with regard to the Partnership's tenants is that some of the tenants may make
rental payments late as the result of the failure of the tenants to achieve year
2000 compliance of their systems used in the payment of rent, the failure of the
tenant's financial institutions to achieve year 2000 compliance, or the
temporary disruption of the tenants' businesses. The Y2K Team is in the process
of requesting responses from the Partnership's tenants indicating the extent to
which their systems are currently year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000. The general partners cannot be assured
that the tenants have addressed all possible year 2000 issues. The late payment
of rent by one or more tenants would affect the results of operations of the
Partnership in the short-term.
The general partners are also aware of predictions that the year 2000
problem, if uncorrected, may result in a global economic crisis. The general
partners are not able to determine if such predictions are true. A widespread
disruption of the economy could affect the ability of the Partnership's tenants
to pay rent and, accordingly, could have a material impact on the results of
operations of the Partnership.
Because payment of rent is under the control of the Partnership's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, the general partners will
assess the remedies available to the Partnership under its lease agreements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
On May 11, 1999, four limited partners in several CNL Income Funds
served a derivative and purported class action lawsuit filed April 22,
1999 against the general partners and APF in the Circuit Court of the
Ninth Judicial Circuit of Orange County, Florida, alleging that the
general partners breached their fiduciary duties and violated
provisions of certain of the CNL Income Fund partnership agreements in
connection with the proposed Merger. The plaintiffs are seeking
unspecified damages and equitable relief. On July 8, 1999, the
plaintiffs filed an amended complaint which, in addition to naming
three additional plaintiffs, includes allegations of aiding and
abetting and conspiring to breach fiduciary duties, negligence and
breach of duty of good faith against certain of the defendants and
seeks additional equitable relief. As amended, the caption of the case
is Jon Hale, Mary J. Hewitt, Charles A. Hewitt, Gretchen M. Hewitt
---------------------------------------------------------------
Bernard J. Schulte, Edward M. and Margaret Berol Trust, and Vicky
-----------------------------------------------------------------
Berol v. James M. Seneff, Jr., Robert A. Bourne, CNL Realty
-----------------------------------------------------------
Corporation, and CNL American Properties Fund, Inc., Case No.
----------------------------------------------------
CIO-99-0003561.
On June 22, 1999, a limited partner of several CNL Income Funds served
a purported class action lawsuit filed April 29, 1999 against the
general partners and APF, Ira Gaines, individually and on behalf of a
-------------------------------------------
class of persons similarly situated, v. CNL American Properties Fund,
---------------------------------------------------------------------
Inc., James M. Seneff, Jr., Robert A. Bourne, CNL Realty Corporation,
---------------------------------------------------------------------
CNL Fund Advisors, Inc., CNL Financial Corporation a/k/a CNL Financial
----------------------------------------------------------------------
Corp., CNL Financial Services, Inc. and CNL Group, Inc., Case NO.
---------------------------------------------------------
CIO-99-3796, in the Circuit Court of the Ninth Judicial Circuit of
Orange County, Florida, alleging that the general partners breached
their fiduciary duties and that APF aided and abetted their breach of
fiduciary duties in connection with the proposed Merger. The plaintiff
is seeking unspecified damages and equitable relief.
On September 23, 1999, Judge Lawrence Kirkwood entered an order
consolidating the two cases under the caption In re: CNL Income Funds
-----------------------
Litigation, Case No. 99-3561. Pursuant to this order, the plaintiffs
----------------------------
in these cases filed a consolidated and amended complaint on November
8, 1999, and the various defendants, including the general partners,
have 45 days to respond to that consolidated complaint.
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.
-----------------
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
2.1 Agreement and Plan of Merger by and between the Registrant
and CNL American Properties Fund, Inc. ("APF") dated March
11, 1999 and as amended on June 4, 1999, and as amended
October 27, 1999 (Filed as Appendix B to the Prospectus
Supplement for the Registrant, constituting a part of
Amendment No. 3 to the Registration Statement of APF on Form
S-4, File No. 333-74329.)
3.1 Certificate of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to
Registration Statement No. 33-10351 on Form S-11 and
incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as Exhibit
3.2 to Form 10-K filed with the Securities and Exchange
Commission on April 2, 1993, and incorporated herein by
reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 4.1 to Amendment No. 1 to
Registration Statement No. 33-10351 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as Exhibit
3.2 to Form 10-K filed with the Securities and Exchange
Commission on April 2, 1993, and incorporated herein by
reference.)
10.1 Property Management Agreement (Included as Exhibit 10.1 to
Form 10-K filed with the Securities and Exchange Commission
on April 2, 1993, and incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc.
(Included as Exhibit 10.2 to Form 10-K filed with the
Securities and Exchange Commission on March 30, 1995, and
incorporated herein by reference.)
10.3 Assignment of Property Management Agreement from CNL Income
Fund Advisors, Inc. to CNL Fund Advisors, Inc. (Included as
Exhibit 10.3 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996 and incorporated herein
by reference.)
27 Financial Data Schedule (Filed herewith.)
17
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
18
<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, 1999.
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)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF CNL INCOME FUND II, LTD. AT SEPTEMBER 30, 1999, AND ITS STATEMENT OF
INCOME FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FORM 10-Q OF CNL INCOME FUND II, LTD. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,514,111
<SECURITIES> 0
<RECEIVABLES> 71,742
<ALLOWANCES> 57,806
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 15,839,001
<DEPRECIATION> 3,813,451
<TOTAL-ASSETS> 18,080,738
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,365,728
<TOTAL-LIABILITY-AND-EQUITY> 18,080,738
<SALES> 0
<TOTAL-REVENUES> 1,345,229
<CGS> 0
<TOTAL-COSTS> 509,602
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,271,734
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,271,734
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,271,734
<EPS-BASIC> 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>
