UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East South Street
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 650-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Units of limited partnership interest ($500 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 50,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
Item 1. Business
CNL Income Fund II, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on November 13, 1986. The general partners of the Partnership are Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on January 2, 1987, the
Partnership offered for sale up to $25,000,000 in limited partnership interests
(the "Units") (50,000 Units at $500 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended. The
offering terminated on August 21, 1987, as of which date the maximum offering
proceeds of $25,000,000 had been received from investors who were admitted to
the Partnership as limited partners (the "Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of selected national and regional fast-food restaurant chains (the
"Restaurant Chains"). Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totalled
$22,300,178, and were used to acquire, either directly or indirectly through
joint venture arrangements, 39 Properties. During the year ended December 31,
1993, the Partnership sold its Property in Salisbury, North Carolina, and
reinvested the majority of the net sales proceeds in a Jack in the Box Property
in Lubbock, Texas. During the year ended December 31, 1994, the Partnership sold
two of its Properties in Graham, Texas, and Medina, Ohio, and reinvested the net
sales proceeds in two Checkers Properties, consisting of only land, located in
Fayetteville and Atlanta, Georgia, and a Kenny Rogers Roasters Property in
Arvada, Colorado, which is owned as tenants-in-common with an affiliate of the
General Partners. During the year ended December 31, 1997, the Partnership sold
its Properties in Eagan, Minnesota; Jacksonville, Florida; Farmington Hills
(10-mile Road), Michigan; Farmington Hills (12-mile Road), Michigan; Plant City,
Florida; Mathis, Texas and Avon Park, Florida and reinvested a portion of these
net sales proceeds in a Property in Mesa, Arizona, a Property in Smithfield,
North Carolina and a Property in Vancouver, Washington, all of which are owned
as tenants-in-common with affiliates of the General Partners. In addition,
during 1997, Show Low Joint Venture, in which the Partnership owns a 64 percent
interest, sold its Property in Show Low, Arizona to the tenant and reinvested
the net sales proceeds in a Property in Greensboro, North Carolina. During 1998,
the Partnership reinvested the net sales proceeds from the 1997 sales of the
Properties in Jacksonville, Florida and Mathis, Texas in a Property in Overland
Park, Kansas, and a Property in Memphis, Tennessee, as tenants-in-common with
affiliates of the General Partners. As a result of the above transactions, as of
December 31, 1998, the Partnership owned 38 Properties, including interests in
three Properties owned by joint ventures in which the Partnership is a
co-venturer and six Properties owned with affiliates as tenants-in-common. The
lessee of the two Properties consisting of only land owns the buildings
currently on the land and has the right, if not in default under the lease, to
remove the buildings from the land at the end of the lease terms. The Properties
are leased on a triple-net basis with the lessees responsible for all repairs
and maintenance, property taxes, insurance and utilities.
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").
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. APF has agreed to issue shares of its
common stock, par value $0.01 per share (the "APF Shares"), as consideration for
the Merger. At a special meeting of the partners that is expected to be held in
the third quarter of 1999, 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. See Item 8. Financial Statements and Supplementary Data -- Note 12.
Subsequent Event.
In the event that the Limited Partners vote against the Merger, the
Partnership will hold its Properties until the General Partners determine that
the sale or other disposition of the Properties is advantageous in view of the
Partnership's investment objectives. In deciding whether to sell Properties, the
General Partners will consider factors such as potential capital appreciation,
net cash flow and federal income tax considerations. Certain lessees have been
granted options to purchase Properties, generally at the Property's then fair
market value after a specified portion of the lease term has elapsed. The
Partnership has no obligation to sell all or any portion of a Property at any
particular time, except as may be required under property or joint venture
purchase options granted to certain lessees.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership and
joint ventures in which the Partnership is a co-venturer provide for initial
lease terms, ranging from four to 20 years (the average being 16 years), and
expire between 2000 and 2018. The leases are on a triple-net basis, with the
lessee generally responsible for all repairs and maintenance, property taxes,
insurance and utilities. The leases of the Properties provide for minimum base
annual rental payments (payable in monthly installments) ranging from
approximately $8,300 to $222,800. Generally, the leases provide for percentage
rent, based on sales in excess of a specified amount, to be paid annually. In
addition, certain leases provide for increases in the annual base rent during
the lease term.
Generally, the leases of the Properties provide for two to four
five-year renewal options subject to the same terms and conditions as the
initial lease. Certain lessees also have been granted options to purchase
Properties at the Property's then fair market value, or pursuant to a formula
based on the original cost of the Property, after a specified portion of the
lease term has elapsed. Additionally, certain leases provide the lessee an
option to purchase up to a 49 percent joint venture interest in the Property,
after a specified portion of the lease term has elapsed, at an option purchase
price similar to those described above multiplied by the percentage interest in
the Property with respect to which the option is being exercised. A limited
number of leases provide for a purchase option price which is computed pursuant
to a formula based on various measures of value contained in an independent
appraisal of the Property.
The leases also generally provide that, in the event the Partnership
wishes to sell the Property subject to a particular lease, the Partnership must
first offer the lessee the right to purchase the Property on the same terms and
conditions, and for the same price, as any offer which the Partnership has
received for the sale of the Property.
During the year ended December 31, 1998, the Partnership reinvested the
net sales proceeds from the 1997 sales of the Properties in Jacksonville,
Florida and Mathis, Texas in a Property in Overland Park, Kansas, and a Property
in Memphis, Tennessee, as tenants-in-common with affiliates of the General
Partners. The lease terms for these Properties are substantially the same as the
Partnership's other leases as described above in the first three paragraphs of
this section.
In addition, during 1998, the tenant of the Property in Oxford, Alabama
exercised its option to extend the lease for an additional five years beginning
in May 1998 with an increase in rental payments of 20 percent per year. All
other lease terms remained unchanged and are substantially the same as the
Partnership's other leases as described above.
Major Tenants
During 1998, two lessees of the Partnership, Golden Corral Corporation
and Restaurant Management Services, Inc., each contributed more than ten percent
of the Partnership's total rental income (including the Partnership's share of
the rental income from three Properties owned by joint ventures and six
Properties owned with affiliates as tenants-in-common). As of December 31, 1998,
Golden Corral Corporation was the lessee under leases relating to six
restaurants and Restaurant Management Services, Inc. was the lessee under leases
relating to four restaurants. It is anticipated that, based on the minimum
rental payments required by the leases, each of these lessees will continue to
contribute more than ten percent of the Partnership's total rental income in
1999. In addition, two Restaurant Chains, Golden Corral Family Steakhouse
Restaurants ("Golden Corral") and Popeyes Famous Fried Chicken Restaurants
("Popeyes"), each accounted for more than ten percent of the Partnership's total
rental and mortgage interest income in 1998 (including the Partnership's share
of the rental income from three Properties owned by joint ventures and six
Properties owned with affiliates as tenants-in-common). In 1999, it is
anticipated that these two Restaurant Chains each will continue to account for
more than ten percent of the total rental income to which the Partnership is
entitled under the terms of its leases. Any failure of these lessees or
Restaurant Chains could materially affect the Partnership's income if the
Partnership is not able to re-lease the Properties in a timely manner. As of
December 31, 1998, no single tenant or group of affiliated tenants leased
Properties with an aggregate carrying value, excluding acquisition fees and
certain acquisition expenses, in excess of 20 percent of the total assets of the
Partnership.
Joint Venture Arrangements
The Partnership has entered into three separate joint venture
arrangements, Kirkman Road Joint Venture, Holland Joint Venture, and Show Low
Joint Venture, to purchase and hold three Properties through such joint
ventures. Each joint venture arrangement provides for the Partnership and its
joint venture partners to share in all costs and benefits associated with the
joint venture in proportion to each partner's percentage interest in the joint
venture. The Partnership and its joint venture partners are also jointly and
severally liable for all debts, obligations and other liabilities of the joint
venture.
Each joint venture has an initial term of approximately 20 years
(generally the same term as the initial term of the lease for the Property in
which the joint venture invested), and after the expiration of the initial term,
continues in existence from year to year unless terminated at the option of any
joint venture partner or by an event of dissolution. Events of dissolution
include the bankruptcy, insolvency or termination of any joint venturer, sale of
the Property owned by the joint venture and mutual agreement of the Partnership
and its joint venture partner or partners to dissolve the joint venture.
The Partnership shares management control of Kirkman Road Joint Venture
with an unrelated third party and shares management control equally with
affiliates of the General Partners for Holland Joint Venture and Show Low Joint
Venture. The joint venture agreements restrict each venturer's ability to sell,
transfer or assign its joint venture interest without first offering it for sale
to its joint venture partner or partners, either upon such terms and conditions
as to which the venturers may agree or, in the event the venturers cannot agree,
on the same terms and conditions as any offer from a third party to purchase
such joint venture interest.
Net cash flow from operations of Kirkman Road Joint Venture, Holland
Joint Venture and Show Low Joint Venture is distributed 50 percent, 49 percent
and 64 percent, respectively, to the Partnership and the balance is distributed
to each other joint venture partner in accordance with its percentage interest
in the joint venture. Any liquidation proceeds, after paying joint venture debts
and liabilities and funding reserves for contingent liabilities, will be
distributed first to the joint venture partners with positive capital account
balances in proportion to such balances until such balances equal zero, and
thereafter in proportion to each joint venture partner's percentage interest in
the joint venture.
In addition to the above joint venture agreements, in September 1994,
the Partnership entered into an agreement to hold a Property as
tenants-in-common with an affiliate of the General Partners. The agreement
provides for the Partnership and the affiliate to share in the profits and
losses of the Property in proportion to each co-venturer's percentage interest.
The Partnership owns a 33.87% interest in this Property.
In addition, during the year ended December 31, 1997, the Partnership
entered into three separate agreements to hold a Property in Mesa, Arizona, a
Property in Smithfield, North Carolina and a Property in Vancouver, Washington,
as tenants-in-common with affiliates of the General Partners. The agreements
provide for the Partnership and the affiliates to share in the profits and
losses of the Properties in proportion to each co-venturer's percentage
interest. The Partnership owns an approximate 58 percent, 47 percent, and 37
percent interest, in these Properties in Mesa, Arizona, Smithfield, North
Carolina and Vancouver, Washington, respectively.
In addition, in January 1998, the Partnership entered into two
agreements to hold a Property in Overland Park, Kansas and a Property in
Memphis, Tennessee, as tenants-in-common, with affiliates of the General
Partners. The agreements provide for the Partnership and the affiliates to share
in the profits and losses of the Property and net cash flow from the Property,
in proportion to each co-venturer's percentage interest. The Partnership owns an
approximate 39 percent and a 13 percent interest in the Properties in Overland
Park, Kansas and Memphis, Tennessee, respectively.
Certain Management Services
CNL Fund Advisors, Inc., an affiliate of the General Partners, provides
certain services relating to management of the Partnership and its Properties
pursuant to a management agreement with the Partnership. Under this agreement,
CNL Fund Advisors, Inc. is responsible for collecting rental payments,
inspecting the Properties and the tenants' books and records, assisting the
Partnership in responding to tenant inquiries and notices and providing
information to the Partnership about the status of the leases and the
Properties. CNL Fund Advisors, Inc. also assists the General Partners in
negotiating the leases. For these services, the Partnership has agreed to pay
CNL Fund Advisors, Inc. an annual fee of one-half of one percent of Partnership
assets (valued at cost) under management, not to exceed the lesser of one
percent of gross rental revenues or competitive fees for comparable services.
Under the property management agreement, the property management fee 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"), calculated in accordance with the
Partnership's limited partnership agreement (the "Partnership Agreement"). In
any year in which the Limited Partners have not received the 10% Preferred
Return, no property management fee will be paid.
The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
Competition
The fast-food and family-style restaurant business is characterized by
intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation and the officers and employees of CNL Fund Advisors, Inc. perform
certain services for the Partnership. In addition, the General Partners have
available to them the resources and expertise of the officers and employees of
CNL Group, Inc., a diversified real estate company, and its affiliates, who may
also perform certain services for the Partnership.
Item 2. Properties
As of December 31, 1998, the Partnership owned, either directly or
through joint venture arrangements, 38 Properties located in 18 states.
Reference is made to the Schedule of Real Estate and Accumulated Depreciation
filed with this report for a listing of the Properties and their respective
costs, including acquisition fees and certain acquisition expenses.
Description of Properties
Land. The Partnership's Property sites range from approximately 11,500
to 86,000 square feet depending upon building size and local demographic
factors. Sites purchased by the Partnership are in locations zoned for
commercial use which have been reviewed for traffic patterns and volume.
Buildings. Each of the Properties owned by the Partnership includes a
building that is one of a Restaurant Chain's approved designs. However, the
buildings located on the two Checkers Properties are owned by the tenant while
the land parcels are owned by the Partnership. The buildings generally are
rectangular and are constructed from various combinations of stucco, steel,
wood, brick and tile. The sizes of the buildings owned by the Partnership range
from approximately 1,300 to 9,900 square feet. All buildings on Properties
acquired by the Partnership are freestanding and surrounded by paved parking
areas. Buildings are suitable for conversion to various uses, although
modifications may be required prior to use for other than restaurant operations.
Generally, a lessee is required, under the terms of its lease
agreement, to make such capital expenditures as may be reasonably necessary to
refurbish buildings, premises, signs and equipment so as to comply with the
lessee's obligations, if applicable, under the franchise agreement to reflect
the current commercial image of its Restaurant Chain. These capital expenditures
are required to be paid by the lessee during the term of the lease.
Leases with Major Tenants. The terms of the leases with each of the
Partnership's major tenants as of December 31, 1998 (see Item 1. Business Major
Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Golden Corral Corporation leases six Golden Corral restaurants. The
initial term of each lease is 15 years (expiring between 2002 and 2012) and the
average minimum base annual rent is approximately $91,800 (ranging from
approximately $56,200 to $152,700).
Restaurant Management Services, Inc. leases four Popeyes restaurants.
The initial term of each lease is from 12 to 20 years (expiring between 2000 and
2008) and the average minimum base annual rent is approximately $57,100 (ranging
from approximately $50,400 to $64,400).
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners or any affiliate of
the General Partners, nor any of their respective properties, is a party to, or
subject to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of March 11, 1999 there were 2,207 holders of record of the Units.
There is no public trading market for the Units and it is not anticipated that a
public market for the Units will develop. Limited Partners who wish to sell
their Units may offer the Units for sale pursuant to the Partnership's
distribution reinvestment plan (the "Plan"), and Limited Partners who wish to
have their distributions used to acquire additional Units (to the extent Units
are available for purchase), may do so pursuant to such Plan. The General
Partners have the right to prohibit transfers of Units. From inception through
December 31, 1998, the price paid for any Unit transferred pursuant to the Plan
was $475 per Unit. The price paid for any Unit transferred other than pursuant
to the Plan was subject to negotiation by the purchaser and the selling Limited
Partner. The Partnership will not redeem or repurchase Units.
The following table reflects, for each calendar quarter, the high, low
and average sales prices for transfers of Units during 1998 and 1997 other than
pursuant to the Plan, net of commissions.
<TABLE>
<CAPTION>
<S> <C>
1998 (1) 1997 (1)
-------------------------------- --------------------------------
High Low Average High Low Average
------- ------- ---------- ------- ------- ----------
First Quarter $456 $431 $444 $500 $465 $478
Second Quarter 395 395 395 500 411 447
Third Quarter 475 361 444 500 424 464
Fourth Quarter 430 420 423 475 450 461
</TABLE>
(1) A total of 207 and 477 Units were transferred other than pursuant to
the Plan for the years ended December 31, 1998 and 1997, respectively.
The capital contribution per Unit was $500. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
For the years ended December 31, 1998 and 1997, the Partnership
declared cash distributions of $3,294,507 and $2,376,000, respectively, to the
Limited Partners. During 1998, distributions included a special distribution of
$1,232,003, as a result of the distribution of net sales proceeds from the 1997
sales of the Properties in Avon Park, Florida and Farmington Hills, Michigan.
This amount was applied toward the Limited Partners' cumulative 10% Preferred
Return. In deciding whether to sell Properties, the General Partners will
consider factors such as potential capital appreciation, net cash flow, and
federal income tax considerations. The reduced number of Properties for which
the partnership receives rental payments, as well as ongoing operations, reduced
the Partnership's revenues in 1998 and is expected to reduce the Partnership's
revenues in subsequent years. The decrease in Partnership revenues, combined
with the fact that a significant portion of the Partnership's expenses are fixed
in nature, resulted in a decrease in cash distributions to the Limited Partners
during 1998. No amounts distributed to the Limited Partners for the years ended
December 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. No distributions have
been made to the General Partners to date. As indicated in the chart below, the
distributions were declared at the close of each of the Partnership's calendar
quarters. These amounts include monthly distributions made in arrears for the
Limited Partners electing to receive such distributions on this basis.
Quarter Ended 1998 1997
-------------------- ------------- ------------
March 31 $1,747,628 $594,000
June 30 515,625 594,000
September 30 515,625 594,000
December 31 515,629 594,000
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although the General Partners, in their sole discretion, may elect to pay
distributions monthly.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
<S> <C>
1998 1997 1996 1995 1994
------------- -------------- -------------- --------------- --------------
Year ended December 31:
Revenues (1) $2,337,414 $ 2,547,854 $2,455,884 $ 2,455,754 $ 2,323,678
Net income (2) 1,733,739 3,639,880 1,866,961 1,838,517 1,925,517
Cash distributions
declared (3) 3,294,507 2,376,000 2,376,000 2,376,000 2,376,000
Net income per Unit (2) 34.32 72.18 36.97 36.40 38.14
Cash distributions declared
per Unit 65.89 47.52 47.52 47.52 47.52
At December 31:
Total assets $18,392,911 $19,959,059 $18,617,318 $19,110,615 $19,736,258
Partners' capital 17,640,881 19,201,649 17,937,769 18,446,808 18,984,291
</TABLE>
(1) Revenues include equity in earnings of joint ventures.
(2) Net income for the year ended December 31, 1998 has been reduced by
real estate disposition fees of $45,150 as a result of the 1997 sales
of two Properties. Net income for the years ended December 31, 1997 and
1994, includes $1,476,124 and $70,554, respectively, from gain on sale
of land and buildings. In addition, net income for the year ended
December 31, 1994, includes $29,904 from a loss on sale of land and
building. Net income for the years ended December 31, 1997 and 1994
also includes lease termination income of $214,000 and $198,482,
respectively, recognized by the Partnership in connection with
consideration the Partnership received for re-leasing the former
tenants from their obligations under the terms of the leases of three
of the Properties sold.
(3) Distributions for the year ended December 31, 1998 include a special
distribution to the Limited Partners of $1,232,003 as a result of the
distribution of the net sales proceeds from the 1997 sales of two
Properties.
The above selected financial data should be read in conjunction with
the financial statements and related notes contained in Item 8 hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership 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
restaurant Properties were to be constructed, which are leased primarily to
operators of selected national and regional fast-food Restaurant Chains. The
leases are triple-net leases, with the lessees responsible for all repairs and
maintenance, property taxes, insurance and utilities. As of December 31, 1998,
the Partnership owned 38 Properties, either directly or indirectly through joint
venture arrangements.
Liquidity and Capital Resources
During the years ended December 31, 1998, 1997, and 1996, the
Partnership generated cash from operations (which includes cash received from
tenants, distributions from joint ventures and interest received, less cash paid
for expenses) of $2,135,691, $2,157,912, and $2,347,731, respectively. The
decrease in cash from operations during 1998, as compared to 1997, is primarily
a result of changes in income and expenses as described in "Results of
Operations" below, and a result of changes in the Partnership's working capital.
The decrease in cash from operations during 1997, as compared to 1996, is
primarily a result of changes in the Partnership's working capital. Cash from
operations was also affected by the following transactions during the years
ended December 31, 1998, 1997, and 1996.
In 1993, the Partnership accepted a promissory note from the tenant of
two Properties in Farmington Hills, Michigan, whereby $61,987, which had been
included in receivables for past due rents, was converted to a loan receivable.
The loan, which was non-interest bearing, was collected in 48 monthly
installments with collections commencing January 1993. The receivable was
collected in full during 1996.
In March 1996, the Partnership accepted a promissory note from the
former tenant of the Property in Gainesville, Texas, in the amount of $96,502,
representing past due rental and other amounts that had been included in
receivables and for which the Partnership had established an allowance for
doubtful accounts, and real estate taxes previously recorded as an expense by
the Partnership. Payments are due in 60 monthly installments of $2,156,
including interest at a rate of 11 percent per annum, commencing on June 1,
1996. Due to the uncertainty of the collectibility of this note, the Partnership
established an allowance for doubtful accounts and is recognizing income as
collected. During 1998, the Partnership collected and recognized as income
approximately $18,700 relating to this promissory note. As of December 31, 1998
and 1997, the balance in the allowance for doubtful accounts relating to this
promissory note was $55,330 and $74,590, respectively, including accrued
interest of $2,654 in 1998 and 1997.
Other sources and uses of capital included the following during the
years ended December 31, 1998, 1997, and 1996.
In November 1995, the Partnership entered into a new lease for the
Property in Lombard, Illinois. In connection therewith, the Partnership incurred
approximately $40,600 in renovation costs which were paid during the years ended
December 31, 1996 and 1997. Additional renovation costs of $25,000 were funded
by the tenant, in accordance with the terms of the lease. The renovations were
completed in November 1996 and rental payments commenced in July 1997, in
accordance with the terms of the lease.
In January 1996, the Partnership entered into a promissory note with
the corporate General Partner for a loan in the amount of $26,300 in connection
with the operations of the Partnership. The loan, which was uncollateralized and
bore interest at a rate of prime plus 0.25% per annum was due on demand. The
Partnership repaid the loan in full, along with approximately $200 in interest,
to the corporate General Partner. In addition, 1997 and 1996, the Partnership
entered into various promissory notes with the corporate General Partner for
loans totalling $721,000 and $177,600, respectively, in connection with the
operations of the Partnership. The loans were uncollateralized, non-interest
bearing and due on demand. As of December 31, 1997, the Partnership had repaid
the loans in full to the corporate General Partner.
In January 1997, Show Low Joint Venture, in which the Partnership owns
a 64 percent interest, sold its Property to the tenant for $970,000, resulting
in a gain to the joint venture of approximately $360,000 for financial reporting
purposes. The Property was originally contributed to Show Low Joint Venture in
July 1990 and had a total cost of approximately $663,500, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the joint venture sold
the Property for approximately $306,500 in excess of its original purchase
price. In June 1997, Show Low Joint Venture reinvested $782,413 of the net sales
proceeds in a Darryl's Property in Greensboro, North Carolina. As of December
31, 1997, the Partnership had received approximately $124,400, representing a
return of capital, for its pro-rata share of the uninvested net sales proceeds.
The Partnership used these amounts to pay liabilities of the Partnership,
including quarterly distributions to the Limited Partners.
During 1997, the Partnership sold its Property in Eagan, Minnesota, to
the tenant, for $668,033 and received net sales proceeds of $665,882, of which
$42,000 were in the form of a promissory note, resulting in a gain of $158,251
for financial reporting purposes. This Property was originally acquired by the
Partnership in August 1987 and had a cost of approximately $601,100, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the Property for approximately $64,800 in excess of its
original purchase price. In October 1997, the Partnership reinvested the net
cash sales proceeds of approximately $623,900 in a Property in Mesa, Arizona, as
tenants-in-common with an affiliate of the General Partners. In connection
therewith, the Partnership and the affiliate entered into an agreement whereby
each co-venturer will share in the profits and losses of the Property in
proportion to each co-venturer's interest. The Partnership owns an approximate
58 percent interest in the Property. The Partnership distributed amounts
sufficient to enable the Limited Partners to pay federal and state income taxes,
(at a level reasonably assumed by the General Partners), resulting from the
sale.
In connection with the sale during 1997 of its Property in Eagan,
Minnesota, the Partnership accepted a promissory note in the principal sum of
$42,000. The promissory note bears interest at a rate of 10.50% per annum and is
collateralized by personal property. Initially, the note was to be collected in
18 monthly installments of interest only and thereafter, the entire principal
balance became due. During 1998, the note was amended to require six monthly
installments of $7,368, including interest, commencing on July 1, 1998. As of
December 31, 1998 and 1997, the mortgage note receivable balance was $6,872 and
$42,734, respectively, including accrued interest of $56 and $734, respectively.
In January 1999, the balance, including accrued interest, was collected.
In addition, during 1997, the Partnership sold its Properties in
Jacksonville, Plant City and Avon Park, Florida; its Property in Mathis, Texas
and its two Properties in Farmington Hills, Michigan to third parties for
aggregate sales prices of $4,162,006 and received aggregate net sales proceeds
of $4,035,196, resulting in aggregate gains of $1,317,873 for financial
reporting purposes. These six Properties were originally acquired by the
Partnership during 1987 and had aggregate costs of approximately $3,338,800,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold these six Properties for approximately $714,400, in the
aggregate, in excess of their original aggregate purchase prices. During 1997,
the Partnership reinvested approximately $1,512,400 of these net sales proceeds
in a Property in Vancouver, Washington, and a Property in Smithfield, North
Carolina, as tenants-in-common with affiliates of the General Partners. As of
December 31, 1997, remaining net sales proceeds from five of the six Properties
of $2,470,175, including accrued interest of $12,505, were being held in
interest bearing escrow accounts. In January 1998, the Partnership reinvested a
portion of the net sales proceeds in a Property in Overland Park, Kansas, and a
Property in Memphis, Tennessee, as tenants-in-common with affiliates of the
General Partners. The Partnership distributed amounts sufficient to enable the
Limited Partners to pay federal and state income taxes, (at a level reasonably
assumed by the General Partners), resulting from these sales. During 1998, the
Partnership distributed the remaining net sales proceeds to the Limited Partners
in a special distribution, as described below. In connection with the sale of
both of the Farmington Hills, Michigan Properties, the Partnership also received
$214,000 as a lease termination fee from the former tenant in consideration of
the Partnership's releasing the tenant from its obligation under the terms of
the leases.
None of the Properties owned by the Partnership or the joint ventures
in which the Partnership owns an interest is or may be encumbered. Subject to
certain restrictions on borrowing from the General Partners, however, the
Partnership may borrow, in the discretion of the General Partners, for the
purpose of maintaining the operations and paying liabilities of the Partnership
including quarterly distributions. The Partnership will not borrow for the
purpose of returning capital to the Limited Partners. The Partnership will not
encumber any of the Properties in connection with any borrowing or advances. The
Partnership also will not borrow under circumstances which would make the
Limited Partners liable to creditors of the Partnership. Affiliates of the
General Partners from time to time incur certain operating expenses on behalf of
the Partnership for which the Partnership reimburses the affiliates without
interest.
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 December 31, 1998, the Partnership had
$889,891 invested in such short-term investments, as compared to $470,194 at
December 31, 1997. The increase in cash and cash equivalents during 1998, as
compared to 1997, 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 December 31, 1998, after payment of distributions
and other liabilities, will be used to meet the Partnership's working capital
and other needs.
During 1998, 1997, and 1996, affiliates of the General Partners
incurred on behalf of the Partnership $116,317, $68,555, and $103,909,
respectively, for certain operating expenses. As of December 31, 1998 and 1997,
the Partnership owed $138,153 and $126,284, respectively, to affiliates for such
amounts and accounting and administrative services. In addition, during the year
ended December 31, 1998, the Partnership incurred $45,150 in real estate
disposition fees due to an affiliate as a result of its services in connection
with the 1997 sales of the Properties in Avon Park, Florida and Farmington
Hills, Michigan. The payment of such fees is deferred until the Limited Partners
have received their cumulative 10% Preferred Return and their adjusted capital
contributions. Other liabilities, including distributions payable, decreased to
$568,727 at December 31, 1998, from $631,126 at December 31, 1997, primarily as
a result of a decrease in distributions payable to Limited Partners at December
31, 1998. The General Partners believe that the Partnership has sufficient cash
on hand to meet its current working capital needs.
Based primarily on current and anticipated future cash from operations,
and during the year ended December 31, 1997, the return of capital from Show Low
Joint Venture, a portion of the proceeds received from the sale of Properties as
described above, and for the years ended December 31, 1997 and 1996, loans
received from the General Partners, the Partnership declared distributions to
the Limited Partners of $3,294,507 for the year ended December 31, 1998, and
$2,376,000 for each of the years ended December 31, 1997 and 1996. This
represents distributions of $65.89 per Unit for the year ended December 31,
1998, and $47.52 per Unit for each of the years ended December 31, 1997 and
1996. Distributions for the year ended December 31, 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. 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 sales of the Properties, the Partnership's total revenue was
reduced during 1998 and is expected to remain at reduced amounts in subsequent
years, while the majority of the Partnership's operating expenses remained
fixed. Therefore, distributions of net cash flow were adjusted during 1998. No
amounts distributed or to be distributed to the Limited Partners for the years
ended December 31, 1998, 1997, and 1996, are required to be 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 believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
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.
Due to low operating expenses and ongoing cash flow, the General
Partners do not believe that working capital reserves are necessary at this
time. In addition, because the leases for the Partnership's Properties are on a
triple-net basis, it is not anticipated that a permanent reserve for maintenance
and repairs will be established at this time. To the extent, however, that the
Partnership has insufficient funds for such purposes, the General Partners will
contribute to the Partnership an aggregate amount of up to one percent of the
offering proceeds for maintenance and repairs.
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.
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. As consideration for the Merger, APF has agreed to
issue 2,393,267 APF Shares which, for the purposes of valuing the merger
consideration, have been valued by APF at $10.00 per APF Share, the price paid
by APF investors in APF's most recent public offering. 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 Partnership's property portfolio
and other assets were valued on a going concern basis (meaning the Partnership
continues unchanged) at $23,548,652 as of December 31, 1998. Legg Mason Wood
Walker, Incorporated has rendered a fairness opinion that the APF Share
consideration, payable by APF, is fair to the Partnership from a financial point
of view. 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 third quarter
of 1999, 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. 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.
Results of Operations
During 1996 and 1997, the Partnership owned and leased 36 wholly owned
Properties (including seven Properties sold during 1997). During 1998, the
Partnership owned and leased 29 wholly owned Properties. In addition, during
1998, 1997, and 1996, the Partnership was a co-venturer in three separate joint
ventures that each owned and leased one Property. During 1996, the Partnership
and an affiliate owned and leased one Property as tenants-in-common, during
1997, the Partnership owned and leased four Properties with affiliates as
tenants-in-common, and during 1998, the Partnership owned and leased six
Properties with affiliates, as tenants-in-common. As of December 31, 1998, the
Partnership owned, either directly, as tenants-in-common with affiliates, or
through joint venture arrangements, 38 Properties, which are, in general,
subject to long-term triple-net leases. The leases of the Properties provide for
minimum base annual rental amounts (payable in monthly installments) ranging
from approximately $8,300 to $222,800. Generally, the leases provide for
percentage rent based on sales in excess of a specified amount to be paid
annually. In addition, certain leases provide for increases in the annual base
rent during the lease term. For further description of the Partnership's leases
and Properties, see Item 1. Business - Leases and Item 2. Properties,
respectively.
During the years ended December 31, 1998, 1997, and 1996, the
Partnership earned $1,773,925, $2,024,119, and $2,224,500, respectively, in
rental income from the Partnership's wholly owned Properties described above.
The decrease in rental income during 1998, as compared to 1997, is primarily
attributable to a decrease in 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 earned from wholly owned Properties is expected to remain at reduced
amounts as a result of the Partnership reinvesting the net sales proceeds in
Properties held as tenants-in-common with affiliates of the General Partners,
and distributing net sales proceeds to the Limited Partners, as described above
in "Liquidity and Capital Resources."
Rental income for 1997, as compared to 1996, decreased primarily as the
result of the sales of seven Properties during 1997. The decrease in rental
income was partially offset by an increase during 1997 due to the fact that
rental payments began in July 1997 under the new lease for the Property in
Lombard, Illinois, as described above in "Liquidity and Capital Resources."
During the years ended December 31, 1998, 1997, and 1996, the
Partnership also earned $51,029, $68,920, and $79,313, respectively, in
contingent rental income. The decrease in contingent rental income for 1998 and
1997, each as compared to the previous year, is primarily due to the 1997 sales
of several Properties, the leases of which required the payment of contingent
rental income.
For the years ended December 31, 1998, 1997, and 1996 , the Partnership
also earned $431,974, $389,915, and $130,996, respectively, attributable to net
income earned by joint ventures in which the Partnership is a co-venturer. The
increase in net income earned by joint ventures during 1998 and 1997, each as
compared to the previous year, is primarily attributable to the fact that during
1998 and 1997, the Partnership reinvested a portion of the net sales proceeds
from the 1997 sales of Properties, in two and five Properties, respectively,
with affiliates of the General Partners as tenants-in-common. The increase in
net income earned by joint ventures during 1998 is partially offset by, and the
increase during 1997, as compared to 1996, 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 from the sale of its Property, as described above in
"Liquidity and Capital Resources," above. Show Low Joint Venture reinvested the
majority of the net sales proceeds in an additional Property in June 1997.
During the year ended December 31, 1998, two of the Partnership's
lessees, Golden Corral Corporation and Restaurant Management Services, Inc.,
each contributed more than ten percent of the Partnership's total rental income
(including the Partnership's share of rental income from three Properties owned
by joint ventures and six Properties owned with affiliates as
tenants-in-common). As of December 31, 1998, Golden Corral Corporation was the
lessee under leases relating to six restaurants and Restaurant Management
Services, Inc. was the lessee under leases relating to four restaurants. It is
anticipated that, based on the minimum annual rental payments required by the
leases, these two lessees will continue to contribute more than ten percent of
the Partnership's total rental income during 1999. In addition, during the year
ended December 31, 1998, two Restaurant Chains, Golden Corral, and Popeyes, each
accounted for more than ten percent of the Partnership's total rental and
mortgage interest income (including the Partnership's share of the rental income
from three Properties owned by joint ventures and six Properties owned with
affiliates as tenants-in-common). In 1999, it is anticipated that these two
Restaurant Chains each will continue to account for more than ten percent of the
total rental income to which the Partnership is entitled under the terms of its
leases. Any failure of these lessees or Restaurant Chains could materially
affect the Partnership's income if the Partnership is not able to re-lease the
Properties in a timely manner.
Operating expenses, including depreciation and amortization expense,
were $558,525, $598,098, and $588,923 for the years ended December 31, 1998,
1997, and 1996, respectively. The decrease in operating expenses during 1998, as
compared to 1997, is primarily due to a decrease in depreciation expense as a
result of the sales of several Properties during 1997. The decrease is partially
offset by an increase in general operating and administrative expenses as a
result of the Partnership incurring certain 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 the future periods.
The decrease in operating expenses during 1998, as compared to 1997, is
also partially offset by an increase as a result of the Partnership incurring
$16,208 in transaction costs relating to the General Partners retaining
financial and legal advisors to assist them in evaluating and negotiating the
proposed Merger with APF, as described above in "Liquidity and Capital
Resources." 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 decrease in operating expenses during 1998, as compared to 1997,
and the increase during 1997, as compared to 1996, is partially due to the fact
that during 1997, the Partnership recorded bad debt expense for past due rental
amounts relating to the Property in Eagan, Minnesota, due to financial
difficulties of the tenant. This Property was sold in June 1997, as described
above in "Liquidity and Capital Resources." The increase in operating expenses
during 1997, as compared to 1996, was also attributable to an increase in
accounting and administrative expenses associated with operating the Partnership
and its Properties. The increase in operating expenses during 1997, as compared
to 1996, was partially offset by a decrease in depreciation expense which
resulted from the sale of the seven Properties during 1997, as described above
in "Liquidity and Capital Resources."
During the year ended December 31, 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 year ended December 31,
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 year ended
December 31, 1998. The payment of these fees is subordinated to the Limited
Partners receiving their cumulative 10% Preferred Return and their adjusted
capital contribution.
As a result of the sales of several Properties, the Partnership
recognized gains totalling $1,476,124 during the year ended December 31, 1997,
for financial reporting purposes. In addition, in connection with the sale of
the Properties in Farmington Hills, Michigan, the Partnership also received
$214,000 as a lease termination fee from the former tenant in consideration of
the Partnership's releasing the tenant from its obligation under the terms of
the leases. No such transactions occurred during the years ended December 31,
1998 and 1996.
The Partnership's leases as of December 31, 1998, are, in general,
triple-net leases and contain provisions that the General Partners believe
mitigate the adverse effect of inflation. Such provisions include clauses
requiring the payment of percentage rent based on certain restaurant sales above
a specified level and/or automatic increases in base rent at specified times
during the term of the lease. Management expects that increases in restaurant
sales volumes due to inflation and real sales growth should result in an
increase in rental income (for certain Properties) over time. Continued
inflation also may cause capital appreciation of the Partnership's Properties.
Inflation and changing prices, however, also may have an adverse impact on the
sales of the restaurants and on potential capital appreciation of the
Properties.
Year 2000
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 currently 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 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 software and
infrastructure of the affiliates regarding the Year 2000 compliance of their
products that are used in the business activities or operations of the
Partnership. The General Partners and affiliates have not yet received
sufficient certifications to be assured that the suppliers have fully considered
and mitigated any potential material impact of the Year 2000 deficiencies. 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. 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 information technology
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. If 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
----
Report of Independent Accountants 15
Financial Statements:
Balance Sheets 16
Statements of Income 17
Statements of Partners' Capital 18
Statements of Cash Flows 19
Notes to Financial Statements 21
Report of Independent Accountants
To the Partners
CNL Income Fund II, Ltd.
In our opinion, the financial statements listed in the index appearing under
item 14(a)(1) present fairly, in all material respects, the financial position
of CNL Income Fund II, Ltd. (a Florida limited partnership) at December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules listed in the index appearing under item 14(a)(2) present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedules are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Orlando, Florida
January 13, 1999, except for Note 12 for which the date is March 11, 1999
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31,
1998 1997
---------------- ----------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation $12,835,304 $13,164,568
Investment in joint ventures 4,353,427 3,568,155
Mortgage note receivable 6,872 42,734
Cash and cash equivalents 889,891 470,194
Restricted cash -- 2,470,175
Receivables, less allowance for doubtful
accounts of $55,435 and $83,254 122,560 80,577
Prepaid expenses 4,801 5,510
Lease costs, less accumulated amortization
of $14,889 and $11,520 5,674 9,043
Accrued rental income 174,382 148,103
----------------- ----------------
$18,392,911 $19,959,059
================= ================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 4,621 $ 7,170
Accrued and escrowed real estate taxes
payable 8,065 4,656
Distributions payable 515,629 594,000
Due to related parties 183,303 126,284
Rents paid in advance and deposits 40,412 25,300
----------------- ----------------
Total liabilities 752,030 757,410
Partners' capital 17,640,881 19,201,649
----------------- ----------------
$18,392,911 $19,959,059
================= ================
See accompanying notes to financial statements.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
1998 1997 1996
-------------- -------------- --------------
Revenues:
Rental income from operating leases $1,773,925 $2,024,119 $2,224,500
Contingent rental income 51,029 68,920 79,313
Interest and other income 80,486 64,900 21,075
-------------- -------------- --------------
1,905,440 2,157,939 2,324,888
-------------- -------------- --------------
Expenses:
General operating and administrative 160,220 137,924 131,628
Professional services 34,731 21,576 26,634
Bad debt expense -- 27,965 --
Real estate taxes -- 410 4,647
State and other taxes 14,733 10,403 4,255
Depreciation and amortization 332,633 399,820 421,759
Transaction costs 16,208 -- --
-------------- -------------- --------------
558,525 598,098 588,923
-------------- -------------- --------------
Income Before Equity in Earnings of
Joint Ventures, Gain on Sale of Land
and Buildings, Real Estate Disposition
Fees, and Lease Termination Income 1,346,915 1,559,841 1,735,965
Equity in Earnings of Joint Ventures 431,974 389,915 130,996
Gain on Sale of Land and Buildings -- 1,476,124 --
Real Estate Disposition Fees (45,150 ) -- --
Lease Termination Income -- 214,000 --
-------------- -------------- --------------
Net Income $1,733,739 $3,639,880 $1,866,961
============== ============== ==============
Allocation of Net Income:
General partners $ 17,789 $ 30,736 $ 18,670
Limited partners 1,715,950 3,609,144 1,848,291
-------------- -------------- --------------
$1,733,739 $3,639,880 $1,866,961
============== ============== ==============
Net Income Per Limited Partner Unit $ 34.32 $ 72.18 $ 36.97
============== ============== ==============
Weighted Average Number of
Limited Partner Units Outstanding 50,000 50,000 50,000
============== ============== ==============
See accompanying notes to financial statements.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997, and 1996
General Partners Limited Partners
---------------------------- ------------------------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ------------ -------------- ------------- ----------- ----------- -----------
Balance, December 31, 1995 $162,000 $161,705 $25,000,000 $(20,317,377) $16,130,302 $(2,689,822) $18,446,808
Distributions to limited
partners ($47.52 per
limited partner unit) -- -- -- (2,376,000) -- -- (2,376,000 )
Net income -- 18,670 -- -- 1,848,291 -- 1,866,961
------------ ----------- ------------- ------------- ----------- ---------- -------------
Balance, December 31, 1996 162,000 180,375 25,000,000 (22,693,377) 17,978,593 (2,689,822) 17,937,769
Distributions to limited
partners ($47.52 per
limited partner unit) -- -- -- (2,376,000) -- -- (2,376,000 )
Net income -- 30,736 -- -- 3,609,144 -- 3,639,880
----------- ------------ -------------- ------------- ---------- ---------- -------------
Balance, December 31, 1997 162,000 211,111 25,000,000 (25,069,377) 21,587,737 (2,689,822) 19,201,649
Distributions to limited
partners ($65.89 per
limited partner unit) -- -- -- (3,294,507) -- -- (3,294,507 )
Net income -- 17,789 -- -- 1,715,950 -- 1,733,739
----------- ------------ -------------- ------------- ----------- ----------- -------------
Balance, December 31, 1998 $162,000 $228,900 $25,000,000 $(28,363,884) $23,303,687 $(2,689,822) $17,640,881
=========== ============ ============== ============= =========== =========== =============
See accompanying notes to financial statements.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
--------------- -------------- --------------
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants $ 1,796,989 $2,054,519 $2,295,531
Distributions from joint ventures 482,671 147,995 164,718
Cash paid for expenses (227,335 ) (80,744 ) (130,042 )
Interest received 83,366 36,142 17,524
--------------- -------------- --------------
Net cash provided by operating
activities 2,135,691 2,157,912 2,347,731
--------------- -------------- --------------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings -- 4,659,078 --
Proceeds received from tenant in connection
with termination of leases -- 214,000 --
Additions to land and buildings on operating
leases -- (29,526 ) (11,107 )
Investment in joint ventures (835,969 ) (2,136,289 ) --
Return of capital from joint venture -- 124,440 --
Collections on mortgage note receivable 35,183 -- --
Decrease (increase) in restricted cash 2,457,670 (2,457,670 ) 25,000
Payment of lease costs -- (4,507 ) (1,930 )
Other -- -- (25,000 )
--------------- -------------- --------------
Net cash provided by (used in)
investing activities 1,656,884 369,526 (13,037 )
--------------- -------------- --------------
Cash Flows from Financing Activities:
Proceeds from loans from corporate
general partner -- 721,000 203,900
Repayment of loans from corporate
general partner -- (721,000 ) (203,900 )
Distributions to limited partners (3,372,878 ) (2,376,000 ) (2,376,000 )
--------------- -------------- --------------
Net cash used in financing activities (3,372,878 ) (2,376,000 ) (2,376,000 )
--------------- -------------- --------------
Net Increase (Decrease) in Cash and Cash
Equivalents 419,697 151,438 (41,306 )
Cash and Cash Equivalents at Beginning of Year 470,194 318,756 360,062
--------------- -------------- --------------
Cash and Cash Equivalents at End of Year $ 889,891 $ 470,194 $ 318,756
=============== ============== ==============
See accompanying notes to financial statements.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
1998 1997 1996
-------------- -------------- --------------
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $1,733,739 $3,639,880 $1,866,961
-------------- -------------- --------------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense -- 27,965 --
Depreciation 329,264 395,837 417,776
Amortization 3,369 3,983 3,983
Gain on sale of land and buildings -- (1,476,124) --
Lease termination income -- (214,000) --
Equity in earnings of joint ventures,
net of distributions 50,697 (241,920) 33,722
Increase in receivables (28,799 ) (4,166) (8,803)
Decrease (increase) in prepaid expenses 709 (691) (1,570)
Increase in accrued rental income (26,279 ) (30,746) (33,234)
Decrease in other assets -- -- 1,750
Increase (decrease) in accounts
payable and accrued expenses 860 (2,304) 4,014
Increase in due to related parties 57,019 81,206 35,824
Increase (decrease) in rents paid in
advance and deposits 15,112 (21,008) 27,308
-------------- -------------- --------------
Total adjustments 401,952 (1,481,968) 480,770
-------------- -------------- --------------
Net Cash Provided by Operating Activities $2,135,691 $2,157,912 $2,347,731
============== ============== ==============
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Mortgage note accepted as consideration in
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
December 31 $ 515,629 $ 594,000 $ 594,000
============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Income Fund II, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for
the purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A.
Bourne. Mr. Seneff and Mr. Bourne are also 50 percent shareholders of
the Corporate General Partner. The general partners have responsibility
for managing the day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the
acquisition of land and buildings at cost, including acquisition and
closing costs. Land and buildings are leased to unrelated third parties
on a triple-net basis, whereby the tenant is generally responsible for
all operating expenses relating to the property, including property
taxes, insurance, maintenance and repairs. The leases are accounted for
using the operating method. Under the operating method, land and
building leases are recorded at cost, revenue is recognized as rentals
are earned and depreciation is charged to operations as incurred.
Buildings are depreciated on the straight-line method over their
estimated useful lives of 30 years. When scheduled rentals vary during
the lease term, income is recognized on a straight-line basis so as to
produce a constant periodic rent over the lease term commencing on the
date the property is placed in service.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental
payments to date. Whenever a tenant defaults under the terms of its
lease, or events or changes in circumstance indicate that the tenant
will not lease the property through the end of the lease term, the
Partnership either reserves or writes-off the cumulative accrued rental
income balance.
When the properties are sold, the related cost and accumulated
depreciation plus any accrued rental income, are removed from the
accounts and gains or losses from sales are reflected in income. The
general partners of the Partnership review the properties for
impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in
value has occurred by comparing the estimated future undiscounted cash
flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, a loss
will be recorded for the amount by which the carrying value of the
asset exceeds its fair market value. Although the
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
general partners have made their best estimate of these factors based
on current conditions, it is reasonably possible that changes could
occur in the near term which could adversely affect the general
partners' estimate of net cash flows expected to be generated from its
properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the
allowance for doubtful accounts, which is netted against receivables,
and to decrease rental or other income or increase bad debt expense for
the current period, although the Partnership continues to pursue
collection of such amounts. If amounts are subsequently determined to
be uncollectible, the corresponding receivable and allowance for
uncollectible accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership's investments in Kirkman
Road Joint Venture, Holland Joint Venture and Show Low Joint Venture,
and the properties in Arvada, Colorado; Mesa, Arizona; Smithfield,
North Carolina; Vancouver, Washington; Overland Park, Kansas; and
Memphis, Tennessee, each of which is held as tenants-in-common with
affiliates, are accounted for using the equity method since the
Partnership shares control with affiliates which have the same general
partners.
Cash and Cash Equivalents - The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds (some of which are
backed by government securities). Cash equivalents are stated at cost
plus accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand
deposits at commercial banks and money market funds may exceed
federally insured levels; however, the Partnership has not experienced
any losses in such accounts. The Partnership limits investment of
temporary cash investments to financial institutions with high credit
standing; therefore, the Partnership believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Lease Costs - Lease incentive costs and brokerage and legal fees
associated with negotiating new leases are amortized over the terms of
the new leases using the straight-line method. When a property is sold
or a lease is terminated, the related lease cost, if any, net of
accumulated amortization is removed from the accounts and charged
against income.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
Income Taxes - Under Section 701 of the Internal Revenue Code, all
income, expenses and tax credit items flow through to the partners for
tax purposes. Therefore, no provision for federal income taxes is
provided in the accompanying financial statements. The Partnership is
subject to certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against
partners' capital and represent a reduction of Partnership equity and a
reduction in the basis of each partner's investment.
Use of Estimates - The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with generally
accepted accounting principles. The more significant areas requiring
the use of management estimates relate to the allowance for doubtful
accounts and future cash flows associated with long-lived assets.
Actual results could differ from those estimates.
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform to 1998 presentation.
These reclassifications had no effect on partners' capital or net
income.
2. Leases:
The Partnership leases its land or land and buildings primarily to
operators of national and regional fast-food restaurants. The leases
are accounted for under the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." The leases have
been classified as operating leases. Substantially all leases are for
15 to 20 years and provide for minimum and contingent rentals. In
addition, the tenant generally pays all property taxes and assessments,
fully maintains the interior and exterior of the building and carries
insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew
the leases for two to four successive five-year periods subject to the
same terms and conditions as the initial lease. Most leases also allow
the tenant to purchase the property at fair market value after a
specified portion of the lease has elapsed.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
1998 1997
--------------- --------------
Land $ 6,608,400 $ 6,608,400
Buildings 9,858,263 9,858,263
--------------- --------------
16,466,663 16,466,663
Less accumulated depreciation (3,631,359 ) (3,302,095 )
--------------- --------------
$12,835,304 $13,164,568
=============== ==============
In June 1997, the Partnership sold its property in Eagan, Minnesota, to
the tenant, for $668,033 and received net sales proceeds of $665,882,
of which $42,000 were in the form of a promissory note, resulting in a
gain of $158,251 for financial reporting purposes. This property was
originally acquired by the Partnership in August 1987 and had a cost of
approximately $601,100, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $64,800 in excess of its original purchase price. In
October 1997, the Partnership used the net sales proceeds to acquire a
property in Mesa, Arizona, as tenants-in-common (see Note 4).
In addition, during 1997, the Partnership sold its properties in
Jacksonville, Plant City and Avon Park, Florida; its property in
Mathis, Texas and two properties in Farmington Hills, Michigan to third
parties for aggregate sales prices of $4,162,006 and received aggregate
net sales proceeds (net of $18,430, which represents amounts due to the
former tenant for prorated rent) of $4,035,196, resulting in aggregate
gains of $1,317,873 for financial reporting purposes. These six
properties were originally acquired by the Partnership during 1987 and
had aggregate costs of approximately $3,338,800, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Partnership
sold these six properties for approximately $714,400, in the aggregate,
in excess of their original aggregate purchase prices. During 1997, the
Partnership reinvested approximately $1,512,400 of these net sales
proceeds in a property in Vancouver, Washington, and a property in
Smithfield, North Carolina, as tenants-in-common with affiliates of the
General Partners (see Note 4). In January 1998, the Partnership
reinvested a portion of these net sales proceeds in a property in
Overland Park, Kansas, and a property in Memphis, Tennessee, as
tenants-in-common with affiliates of the General Partners (see Note 4).
In connection with the sale of both of
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
3. Land and Buildings on Operating Leases - Continued:
the Farmington Hills, Michigan properties, the Partnership also
received $214,000 as a lease termination fee from the former tenant in
consideration of the Partnership's releasing the tenant from its
obligation under the terms of the leases.
Some of the leases provide for escalating guaranteed minimum rents
throughout the lease terms. Income from these scheduled rent increases
is recognized on a straight-line basis over the terms of the leases.
For the years ended December 31, 1998, 1997, and 1996, the Partnership
recognized $26,279, $30,746, and $33,234, respectively, of such income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
1999 $ 1,617,078
2000 1,545,876
2001 1,561,629
2002 1,394,850
2003 1,146,347
Thereafter 5,112,565
-----------------
$12,378,345
=================
Since lease renewal periods are exercisable at the option of the
tenant, the above table only presents future minimum lease payments due
during the initial lease terms. In addition, this table does not
include any amounts for future contingent rentals which may be received
on the leases based on a percentage of the tenant's gross sales.
4. Investment in Joint Ventures:
The Partnership has a 50 percent interest, a 49 percent interest and a
64 percent interest in the profits and losses of Kirkman Road Joint
Venture, Holland Joint Venture and Show Low Joint Venture,
respectively. The remaining interests in Holland Joint Venture and Show
Low Joint Venture are held by affiliates of the general partners. The
Partnership also has a 33.87% interest in a property in Arvada,
Colorado, with an affiliate of the general partners, as
tenants-in-common. The Partnership accounts for its investment in this
property using the equity method since the Partnership shares control
with an affiliate. Amounts relating to its investment are included in
investment in joint ventures.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
4. Investment in Joint Ventures - Continued:
In January 1997, Show Low Joint Venture, in which the Partnership owns
a 64 percent interest, sold its property to the tenant for $970,000,
resulting in a gain to the joint venture of approximately $360,000 for
financial reporting purposes. The property was originally contributed
to Show Low Joint Venture in July 1990 and had a total cost of
approximately $663,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the joint venture sold the property
for approximately $306,500 in excess of its original purchase price. In
June 1997, Show Low Joint Venture reinvested $782,413 of the net sales
proceeds in a Darryl's property in Greensboro, North Carolina. As of
December 31, 1997, the Partnership had received approximately $124,400
representing a return of capital for its pro-rata share of the
uninvested net sales proceeds. As of December 31, 1998, the Partnership
owned a 64 percent interest in the profits and losses of the joint
venture.
In October 1997, the Partnership used the net sales proceeds from the
sale of the property in Eagan, Minnesota (see Note 3) to acquire a
property in Mesa, Arizona, as tenants-in-common with an affiliate of
the general partners. The Partnership accounts for its investment in
this property using the equity method since the Partnership shares
control with an affiliate, and amounts relating to its investment are
included in investment in joint ventures. As of December 31, 1998, the
Partnership owned an approximate 58 percent interest in this property.
In December 1997, the Partnership used the net sales proceeds from the
sale of one of the properties in Farmington Hills, Michigan, to acquire
a property in Smithfield, North Carolina, as tenants-in-common with an
affiliate of the general partners. The Partnership accounts for its
investment in this property using the equity method since the
Partnership shares control with an affiliate, and amounts relating to
its investment are included in investment in joint ventures. As of
December 31, 1998, the Partnership owned a 47 percent interest in this
property.
In addition, in December 1997, the Partnership used the net sales
proceeds from the sale of the property in Plant City, Florida, to
acquire a property in Vancouver, Washington, as tenants-in-common with
affiliates of the general partners. The Partnership accounts for its
investment in this property using the equity method since the
Partnership shares control with affiliates, and amounts relating to its
investment are included in investment in joint ventures. As of December
31, 1998, the Partnership owned an approximate 37 percent interest in
this property.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
4. Investment in Joint Ventures - Continued:
In addition, in January 1998, the Partnership used the net sales
proceeds from the sales of the properties in Jacksonville, Florida and
Mathis, Texas, to acquire a 39.39% 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.
Kirkman Road Joint Venture, Holland Joint Venture, Show Low Joint
Venture and the Partnership and affiliates, as tenants-in-common in six
separate tenancy-in-common arrangements, each own and lease one
property to an operator of national fast-food or family-style
restaurants. The following presents the combined, condensed financial
information for the joint ventures and the six properties held as
tenants-in-common with affiliates at December 31:
1998 1997
-------------- ------------
Land and buildings on operating
leases, less accumulated
depreciation $8,410,940 $7,091,781
Net investment in direct financing
leases 2,121,822 518,399
Cash 37,128 56,815
Receivables 1,570 4,685
Accrued rental income 207,239 102,913
Other assets 1,069 418
Liabilities 32,229 31,673
Partners' capital 10,747,539 7,743,338
Revenues 1,254,276 399,579
Gain on sale of land and building -- 360,002
Net income 1,051,988 687,021
The Partnership recognized income totalling $431,974, $389,915, and
$130,996 for the years ended December 31, 1998, 1997, and 1996,
respectively, from these joint ventures and the properties held as
tenants-in-common with affiliates.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
5. Mortgage Note Receivable:
In connection with the sale in June 1997 of its property in Eagan,
Minnesota, the Partnership accepted a promissory note in the amount of
$42,000. The promissory note bears interest at a rate of 10.50% per
annum and is collateralized by personal property. Initially, the note
was to be collected in 18 monthly installments of interest only and
thereafter, the entire principal balance shall become due. During 1998,
the note was amended to require six monthly installments of $7,368,
including interest, commencing on July 1, 1998. As of December 31, 1998
and 1997, the mortgage note receivable balance was $6,872 and $42,734,
including accrued interest of $56 and $734, respectively.
6. Restricted Cash:
As of December 31, 1997, remaining net sales proceeds of $2,470,175
from the sales of several properties (see Note 3) including accrued
interest of $12,505, were being held in interest-bearing escrow
accounts pending the release of funds by the escrow agent to acquire
additional properties on behalf of the Partnership and to distribute
net sales proceeds to the limited partners. In 1998, the funds were
released from escrow to the Partnership and were used to acquire two
additional properties with affiliates of the general partners and to
make a special distribution to the limited partners (see note 4 and
note 8).
7. Receivables:
In March 1996, the Partnership accepted a promissory note from the
former tenant of the property in Gainesville, Texas, in the amount of
$96,502, representing past due rental and other amounts, which had been
included in receivables and for which the Partnership had established
an allowance for doubtful accounts, and real estate taxes previously
recorded as an expense by the Partnership. Payments are due in 60
monthly installments of $2,156, including interest at a rate of 11
percent per annum, commencing on June 1, 1996. Due to the uncertainty
of the collectibility of this note, the Partnership established an
allowance for doubtful accounts and is recognizing income as collected.
As of December 31, 1998 and 1997, the balances in the allowance for
doubtful accounts of $55,330 and $74,590, respectively, including
accrued interest of $2,654 in 1998 and 1997, represent the uncollected
amounts under this promissory note.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
8. 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").
Generally, net sales proceeds from the sale of properties not in
liquidation of the Partnership, 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 not in
liquidation of the Partnership 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.
Generally, net sales proceeds from a liquidating sale of properties,
will be used in the following order: i) first to pay and discharge all
of the Partnership's liabilities to creditors, ii) second, to establish
reserves that may be deemed necessary for any anticipated or unforeseen
liabilities or obligations of the Partnership, iii) third, to pay all
of the Partnership's liabilities, if any, to the general and limited
partners, iv) fourth, after allocations of net income, gains and/or
losses, to distribute to the partners with positive capital accounts
balances, in proportion to such balances, up to amounts sufficient to
reduce such positive balances to zero, and v) thereafter, any funds
remaining shall then be distributed 95 percent to the limited partners
and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the
Partnership declared distributions to the limited partners of
$3,294,507, $2,376,000, and $2,376,000. Distributions for the year
ended December 31, 1998, included $1,232,003 as a result of the
distribution of net sales proceeds from the 1997 sales of properties in
Avon Park, Florida and Farmington Hills, Michigan. This amount was
applied toward the limited partners' cumulative 10% Preferred Return.
No distributions have been made to the general partners to date.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
9. Income Taxes:
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C>
Net income for financial
reporting purposes $1,733,739 $3,639,880 $1,866,961
Depreciation for financial
reporting purposes in excess
of depreciation for tax
reporting purposes 17,510 19,440 20,922
Gain on sale of land and
buildings for financial
reporting purposes (in excess
of) less than gain for tax
reporting purposes 335,644 (638,739 ) --
Equity in earnings of joint ventures for
tax reporting purposes less than equity
in earnings of joint ventures for
financial reporting purposes (32,934 ) (146,161 ) (1,240 )
Capitalization of transaction costs
for tax reporting purposes 16,208 -- --
Allowance for doubtful
accounts (27,819 ) (42,782 ) 25,225
Accrued rental income (26,279 ) (30,746 ) (33,234 )
Rents paid in advance 18,112 (21,008 ) 22,508
--------------- --------------- ---------------
Net income for federal income
tax purposes $2,034,181 $ 2,779,884 $ 1,901,142
=============== =============== ===============
</TABLE>
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
10. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of
the principal shareholders of CNL Group, Inc., the majority stockholder
of CNL Fund Advisors, Inc. The other individual general partner, Robert
A. Bourne, serves as treasurer, director and vice chairman of the board
of CNL Fund Advisors. During the years ended December 31, 1998, 1997,
and 1996, CNL Fund Advisors, Inc. (hereinafter referred to as the
"Affiliate") performed certain services for the Partnership, as
described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's Properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliate an annual, noncumulative,
subordinated property management fee of one-half of one percent of the
Partnership assets under management (valued at cost) annually. The
property management fee is limited to one percent of the sum of gross
operating revenues from properties wholly owned by the Partnership and
the Partnership's allocable share of gross operating revenues from
joint ventures and the properties held as tenants-in-common with
affiliates or competitive fees for comparable services. In addition,
these fees will be incurred and will be payable only after the limited
partners receive their aggregate, noncumulative 10% Preferred Return.
Due to the fact that these fees are noncumulative, if the limited
partners do not receive their 10% Preferred Return in any particular
year, no property management fees will be due or payable for such year.
As a result of such threshold no property management fees were incurred
during the years ended December 31, 1998, 1997, and 1996.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
10. Related Party Transactions - Continued:
The Affiliate is also 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, cumulative 10% Preferred Return,
plus their adjusted capital contributions. For the year ended December
31, 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 years ended December 31, 1997 and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a
day-to-day basis. The Partnership incurred $86,009, $78,139 and $79,624
for the years ended December 31, 1998, 1997, and 1996, respectively,
for such services.
During 1997, the Partnership acquired a property in Mesa, Arizona, as
tenants-in-common with an affiliate of the general partners, for a
purchase price of $630,554 from CNL BB Corp., also an affiliate of the
general partners. CNL BB Corp. had purchased and temporarily held title
to this property in order to facilitate the acquisition of the property
by the Partnership. The purchase price paid by the Partnership
represented the Partnership's percentage of interest in the costs
incurred by CNL BB Corp. to acquire and carry the property, including
closing costs.
The due to related parties consisted of the following at December 31:
1998 1997
--------------- -------------
Due to Affiliates:
Expenditures incurred on
behalf of the Partnership $ 76,326 $ 59,608
Accounting and administrative
services 61,827 66,676
Deferred, subordinated real
estate disposition fee 45,150 --
--------------- -------------
$183,303 $ 126,284
=============== =============
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
11. Concentration of Credit Risk:
The following schedule presents total rental income from individual
lessees, each representing more than ten percent of the Partnerships'
total rental income (including the Partnership's share of rental income
from joint ventures and the properties held as tenants-in-common with
affiliates) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- -------------
<S> <C>
Golden Corral Corporation $485,839 $408,333 $403,875
Restaurant Management
Services, Inc. 252,292 251,480 N/A
In addition, the following schedule presents total rental and mortgage
interest income from individual restaurant chains, each representing
more than ten percent of the Partnership's total rental and mortgage
interest income (including the Partnership's share of rental income
from joint ventures and properties held as tenants-in-common with
affiliates) for each of the years ended December 31:
1998 1997 1996
------------- -------------- -------------
Golden Corral Family
Steakhouse Restaurants $485,839 $408,333 $403,875
Popeyes Famous Fried
Chicken Restaurants 252,292 251,480 N/A
Wendy's Old Fashioned
Hamburger Restaurants N/A 381,567 421,165
Denny's N/A N/A 388,050
KFC N/A 278,348 358,463
</TABLE>
The information denoted by N/A indicates that for each period
presented, the tenant and the chains did not represent more than ten
percent of the Partnership's total rental, mortgage interest, and
earned income.
Although the Partnership's properties are geographically diverse
throughout the United States and the Partnership's lessees operate a
variety of restaurant concepts, default by any one of these lessees or
restaurant chains could significantly impact the results of operations
of the Partnership if the Partnership is not able to re-lease the
properties in a timely manner.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
12. Subsequent Event:
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 2,393,267 shares of its common stock, par value $0.01 per shares
(the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $10.00 per APF Share, the
price paid by APF investors in APF's most recent public offering. 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 Partnership's property portfolio and other
assets were valued on a going concern basis (meaning the Partnership
continues unchanged) at $23,548,652 as of December 31, 1998. Legg Mason
Wood Walker, Incorporated has rendered a fairness opinion that the APF
Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. 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 third quarter of 1999,
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. 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.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partners of the Registrant are James M. Seneff, Jr., Robert
A. Bourne and CNL Realty Corporation, a Florida corporation. The General
Partners manage and control the Partnership's affairs and have general
responsibility and the ultimate authority in all matters affecting the
Partnership's business. The Partnership has available to it the services,
personnel and experience of CNL Fund Advisors, Inc., and CNL Group, Inc. and
their affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 52, is a principal stockholder of CNL Group,
Inc., a diversified real estate company, and has served as its Chairman of the
Board of Directors, a director and Chief Executive Officer since its formation
in 1980. Mr. Seneff has been Chairman of the Board of Directors, director, and
Chief Executive Officer of CNL Securities Corp. since its formation in 1979. Mr.
Seneff also has held the position of Chairman of the Board of Directors, Chief
Executive Officer, President and director of CNL Management Company, a
registered investment advisor, since its formation in 1976, has served as Chief
Executive Officer, Chairman of the Board and a director of CNL Investment
Company, has served as Chief Executive Officer, a director and Chairman of the
Board of Directors of Commercial Net Lease Realty, Inc., a publicly-traded REIT,
listed on the NYSE, since 1992, served as Chief Executive Officer, a director
and Chairman of the Board of Directors of CNL Realty Advisors, Inc. from its
inception in May 1992 through December 1997, at which time such company merged
with Commercial Net Lease Realty, Inc., and has held the position of Chief
Executive Officer, Chairman of the Board and a director of CNL Institutional
Advisors, Inc., a registered investment advisor, since its inception in December
1990. Mr. Seneff has served as Chairman of the Board of Directors of CNL
American Properties Fund, Inc. since December 1994 and as a director and Chief
Executive Officer since May 1994. Mr. Seneff has served as Chairman of the
Board, Chief Executive Officer and a director of CNL Fund Advisors, Inc. since
March 1994. Mr. Seneff has served as Chairman of the Board, Chief Executive
Officer and a director of CNL Hospitality Properties, Inc. since June 1996 and
of CNL Hospitality Advisors, Inc. since January 1997. Mr. Seneff has also served
as Chairman of the Board, Chief Executive Officer and a director of CNL Health
Care Properties, Inc. since December 1997 and CNL Health Care Advisors, Inc.
since July 1997. Mr. Seneff previously served on the Florida State Commission on
Ethics and is a former member and past Chairman of the State of Florida
Investment Advisory Council, which advises the Florida Board of Administration
investments for various Florida employee retirement funds. The Florida Board of
Administration, Florida's principal investment advisory and money management
agency, oversees the investment of more then $60 billion of retirement funds.
Mr. Seneff has served as a member of the board of directors of First Union
National Bank of Florida since May 1998 and has served as a member of the
Orlando Advisory Board of First Union National Bank of Florida since March 1994.
Since 1971, Mr. Seneff has been active in the acquisition, development, and
management of real estate projects and, directly or through an affiliated
entity, has served as a general partner or joint venturer in over 100 real
estate ventures involved in the financing, acquisition, construction, and rental
of restaurants, office buildings, apartment complexes, hotels, and other real
estate. Included in these real estate ventures are approximately 65 privately
offered real estate limited partnerships in which Mr. Seneff, directly or
through an affiliated entity, serves or has served as a general partner. Also
included are CNL Income Fund, Ltd., CNL Income Fund III, Ltd., CNL Income Fund
IV, Ltd., CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd., CNL Income Fund
VII, Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL Income Fund
X, Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL Income Fund
XIII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL Income Fund
XVI, Ltd., CNL Income Fund XVII, Ltd. and CNL Income Fund XVIII, Ltd. (the "CNL
Income Fund Partnerships"), public real estate limited partnerships with
investment objectives similar to those of the Partnership, in which Mr. Seneff
serves as a general partner. Mr. Seneff received his degree in Business
Administration from Florida State University in 1968.
Robert A. Bourne, age 51, is President and Treasurer of CNL Group,
Inc., President, Treasurer, a director, and a registered principal of CNL
Securities Corp., President, Treasurer, and a director of CNL Investment
Company, and Chief Investment Officer, a director and Treasurer of CNL
Institutional Advisors, Inc., a registered investment advisor. Mr. Bourne served
as President of CNL Institutional Advisor, Inc. from the date of its inception
through July 1997. Mr. Bourne served as President of Commercial Net Lease
Realty, Inc. from July 1992 through February 1996, served as Secretary and
Treasurer from February 1996 through December 1997, and has served as a director
since July 1992 and as Vice Chairman of the Board of Directors since February
1996. In addition, Mr. Bourne served as President of CNL Realty Advisors, Inc.
from May 1992 through February 1996, served as Treasurer from February 1996
through December 1997, served as a director from May 1992 through December 31,
1997 and served as Vice Chairman from February 1996 through December 1997, at
which time such company merged with Commercial Net Lease Realty, Inc. Mr. Bourne
has served as a Vice Chairman of the Board of Directors and Treasurer of CNL
American Properties Fund, Inc. since February 1999, has served as a director
since May 1994 and previously served as President from May 1994 through February
1999. Mr. Bourne has served as a director of CNL Fund Advisors, Inc. since March
1994, has served as Treasurer and Vice Chairman of the Board of Directors since
September 1997, and previously served as President from March 1994 through
September 1997. Mr. Bourne has served as President and a director of CNL
Hospitality Properties, Inc. since June 1996 and of CNL Hospitality Advisors,
Inc. since January 1997. Mr. Bourne has served as President and director of CNL
Health Care Properties, Inc. since December 1997 and CNL Health Care Advisors,
Inc. since July 1997. Mr. Bourne, who joined CNL Securities Corp. in 1979, has
participated as a general partner or joint venturer in over 100 real estate
ventures involved in the financing, acquisition, construction, and rental of
restaurants, office buildings, apartment complexes, hotels, and other real
estate. Included in these real estate ventures are approximately 64 privately
offered real estate limited partnerships in which Mr. Bourne, directly or
through an affiliated entity, serves or has served as a general partner. Also
included are the CNL Income Fund Partnerships, public real estate limited
partnerships with investment objectives similar to those of the Partnership, in
which Mr. Bourne serves as a general partner. Mr. Bourne formerly was a
certified public accountant with Coopers & Lybrand and a partner in the firm of
Bourne & Rose, P.A. Mr. Bourne received a B.A. in Accounting, with honors, from
Florida State University in 1970.
CNL Realty Corporation is a corporation organized on November 26, 1985,
under the laws of the State of Florida. Its sole directors and shareholders are
James M. Seneff, Jr. and Robert A. Bourne, the individual General Partners. CNL
Realty Corporation was organized to serve as the corporate general partner of
real estate limited partnerships, such as the Partnership, organized by one or
both of the individual General Partners. CNL Realty Corporation currently serves
as the corporate general partner of the CNL Income Fund Partnerships.
CNL Fund Advisors, Inc. provides certain management services in
connection with the Partnership and its Properties. CNL Fund Advisors, Inc. is a
corporation organized in 1994 under the laws of the State of Florida, and its
principal office is located at 400 East South Street, Orlando, Florida 32801.
CNL Fund Advisors, Inc. is a majority owned subsidiary of CNL Group, Inc., a
diversified real estate company, and was organized to perform property
acquisition, property management and other services.
CNL Group, Inc., which is the parent company of CNL Fund Advisors,
Inc., was organized in 1980 under the laws of the State of Florida. CNL Group,
Inc. is a diversified real estate company which provides a wide range of real
estate, development and financial services to companies in the United States
through the activities of its subsidiaries. These activities are primarily
focused on the franchised restaurant and hospitality industries. James M.
Seneff, Jr., an individual General Partner of the Partnership, is the Chairman
of the Board, Chief Executive Officer, and a director of CNL Group, Inc. Mr.
Seneff and his wife own all of the outstanding shares of CNL Group, Inc.
The following persons serve as operating officers of CNL Group, Inc. or
its affiliates or subsidiaries in the discretion of the Boards of Directors of
those companies, but, except as specifically indicated, do not serve as members
of the Boards of Directors of those entities. The Boards of Directors have the
responsibility for creating and implementing the policies of CNL Group, Inc. and
its affiliated companies.
Curtis B. McWilliams, age 43, joined CNL Group, Inc. in April 1997 and
currently serves as an Executive Vice President. In addition, Mr. McWilliams has
served as President of CNL Fund Advisors, Inc. and as President of the
Restaurant and Financial Services Groups within CNL Group, Inc. since April
1997. Mr. McWilliams has served as President of CNL American Properties Fund,
Inc. since February 1999 and previously served as Executive Vice President from
February 1998 through February 1999. From September 1983 through March 1997, Mr.
McWilliams was employed by Merrill Lynch & Co., most recently as Chairman of
Merrill Lynch's Private Advisory Services until March 1997. Mr. McWilliams
received a B.S.E. in Chemical Engineering from Princeton University in 1977 and
a Masters of Business Administration with a concentration in finance from the
University of Chicago in 1983.
John T. Walker, age 40, has served as Executive Vice President of CNL
American Properties Fund, Inc. since January 1996, as Chief Operating Officer
since March 1995, and previously served as Senior Vice President since December
1994. In addition, Mr. Walker has served as Executive Vice President of CNL Fund
Advisors, Inc. since January 1996, Chief Operating Officer since April 1995, and
previously served as Senior Vice President from November 1994 through January
1996. In addition, Mr. Walker previously served as Executive Vice President of
CNL Hospitality Properties, Inc. and CNL Hospitality Advisors, Inc. From May
1992 to May 1994, Mr. Walker, a certified public accountant, was Executive Vice
President for Finance and Administration and Chief Financial Officer of Z Music,
Inc., a cable television network (subsequently acquired by Gaylord
Entertainment), where he was responsible for overall financial and
administrative management and planning. From January 1990 through April 1992,
Mr. Walker was Chief Financial Officer of the First Baptist Church in Orlando,
Florida. From April 1984 through December 1989, he was a partner in the
accounting firm of Chastang, Ferrell & Walker, P.A., where he was the partner in
charge of audit and consulting services, and from 1981 to 1984, Mr. Walker was a
Senior Consultant/Audit Senior at Price Waterhouse. Mr. Walker is a Cum Laude
graduate of Wake Forest University with a B.S. in Accountancy and is a certified
public accountant.
Lynn E. Rose, age 50, a certified public accountant, has served as
Secretary of CNL American Properties Fund, Inc. since December 1994 and served
as Treasurer from December 1994 through February 1999. Ms. Rose has served as a
director and Secretary of CNL Fund Advisors, Inc. since March 1994, and as
Treasurer from the date of its inception through June 30, 1997. Ms. Rose has
served as Secretary of CNL Group, Inc. since 1987, as Chief Financial Officer of
CNL Group, Inc. since December 1993, and served as Controller of CNL Group, Inc.
from 1987 until December 1993. In addition, Ms. Rose has served as Chief
Financial Officer and Secretary of CNL Securities Corp. since July 1994. She has
served as Chief Operating Officer, Vice President and Secretary of CNL Corporate
Services, Inc. since November 1994. Ms. Rose also has served as Chief Financial
Officer and Secretary of CNL Institutional Advisors, Inc. since its inception in
1990, as Treasurer of CNL Realty Advisors, Inc. from 1991 to February 1996, and
as Secretary and a director of CNL Realty Advisors, Inc. since its inception in
1991 until December 31, 1997, at which time CNL Realty Advisors, Inc. merged
with Commercial Net Lease Realty, Inc. In addition, Ms. Rose served as Secretary
and Treasurer of Commercial Net Lease Realty, Inc. from 1992 to February 1996.
Ms. Rose also serves as Secretary and Treasurer of CNL Hospitality Properties,
Inc. and CNL Health Care Properties, Inc. and as Secretary, Treasurer and a
director of CNL Hospitality Advisors, Inc. and CNL Health Care Advisors, Inc.
Ms. Rose also currently serves as Secretary for approximately 50 additional
corporations. Ms. Rose oversees the legal compliance, accounting, tenant
compliance, and reporting for over 250 corporations, partnerships and joint
ventures. Prior to joining CNL, Ms. Rose was a partner with Robert A. Bourne in
the accounting firm of Bourne & Rose, P.A., Certified Public Accountants. Ms.
Rose holds a B.A. in Sociology from the University of Central Florida.
Jeanne A. Wall, age 40, has served as Executive Vice President of CNL
American Properties Fund, Inc. since December 1994. Ms. Wall has served as
Executive Vice President of CNL Fund Advisors, Inc. since November 1994, and
previously served as Vice President from March 1994 through November 1994. Ms.
Wall has served as Chief Operating Officer of CNL Investment Company and of CNL
Securities Corp. since November 1994 and has served as Executive Vice President
of CNL Investment Company since January 1991. Ms. Wall joined CNL Securities
Corp. in 1984. In 1985, Ms. Wall became Vice President of CNL Securities Corp.
In 1987, she became Senior Vice President and in July 1997 she became Executive
Vice President of CNL Securities Corp. In this capacity, Ms. Wall serves as
national marketing and sales director and oversees the national marketing plan
for the CNL investment programs. In addition, Ms. Wall oversees product
development, partnership administration and investor services for programs
offered through participating brokers and corporate communications for CNL
Group, Inc. and its affiliates. Ms. Wall also has served as Senior Vice
President of CNL Institutional Advisors, Inc., a registered investment advisor,
from 1990 to 1993, as Vice President of CNL Realty Advisors, Inc. since its
inception in 1991 until December 31, 1997, at which time CNL Realty Advisors,
Inc. merged with Commercial Net Lease Realty, Inc., and served as Vice President
of Commercial Net Lease Realty, Inc. from 1992 through December 31, 1997. In
addition, Ms. Wall serves as Executive Vice President of CNL Hospitality
Properties, Inc., CNL Hospitality Advisors, Inc., CNL Health Care Properties,
Inc. and CNL Health Care Advisors, Inc. Ms. Wall holds a B.A. in Business
Administration from Linfield College and is a registered principal of CNL
Securities Corp. Ms. Wall currently serves as a trustee on the board of the
Investment Program Association and on the Direct Participation Program committee
for the National Association of Securities Dealers (NASD).
Steven D. Shackelford, age 35, a certified public accountant, has
served as Chief Financial Officer of CNL American Properties Fund, Inc. since
January 1997 and as Chief Financial Officer of CNL Fund Advisors, Inc. since
September 1996. From March 1995 to July 1996, Mr. Shackelford was a senior
manager in the national office of Price Waterhouse where he was responsible for
advising foreign clients seeking to raise capital and a public listing in the
United States. From August 1992 to March 1995, he served as a manager in the
Price Waterhouse, Paris, France office serving several multinational clients.
Mr. Shackelford was an audit staff and audit senior from 1986 to 1992 in the
Orlando, Florida office of Price Waterhouse. Mr. Shackelford received a B.A. in
Accounting, with honors, and a Masters of Business Administration from Florida
State University.
Item 11. Executive Compensation
Other than as described in Item 13, the Partnership has not paid and
does not intend to pay any executive compensation to the General Partners or any
of their affiliates. There are no compensatory plans or arrangements regarding
termination of employment or change of control.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 11, 1999, no person was known to the Registrant to be a
beneficial owner of more than five percent of the Units.
The following table sets forth, as of March 11, 1999, the beneficial
ownership interests of the General Partners in the Registrant.
Title of Class Name of Partner Percent of Class
-------------- --------------- ----------------
General Partnership Interests James M. Seneff, Jr. 45%
Robert A. Bourne 45%
CNL Realty Corporation 10%
100%
Neither the General Partners, nor any of their affiliates, owns any
interest in the Registrant, except as noted above. On March 11, 1999, the
Registrant entered into an Agreement and Plan of Merger with CNL American
Properties Fund, Inc. ("APF") pursuant to which the Registrant would be merged
with and into a subsidiary of APF (the "Merger"). For further discussion, see
Item 8. Financial Statements and Supplementary Data -- Note 12.
Subsequent Event.
<PAGE>
Item 13. Certain Relationships and Related Transactions
The table below summarizes the types, recipients, methods of
computation and amounts of compensation, fees and distributions paid or payable
by the Partnership to the General Partners and their affiliates for the year
ended December 31, 1998, exclusive of any distributions to which the General
Partners or their affiliates may be entitled by reason of their purchase and
ownership of Units.
<TABLE>
<CAPTION>
Amount Incurred
Type of Compensation Method of For the Year
and Recipient Computation Ended December 31, 1998
------------- ----------- -----------------------
<S> <C>
Reimbursement to affiliates for Operating expenses are reimbursed Operating expenses incurred on
operating expenses. at the lower of cost or 90 percent behalf of the Partnership: $116,317
of the prevailing rate at which
comparable services could have been Accounting and administrative
obtained in the same geographic services: $86,009
area. If the General Partners or
their affiliates loan funds to the
Partnership, the General Partners
or their affiliates will be
reimbursed for the interest and
fees charged to them by the
unaffiliated lenders for such
loans. Affiliates of the General
Partners from time to time incur
certain operating expenses on
behalf of the Partnership for which
the Partnership reimburses the
affiliates without interest.
Annual, subordinated property management One-half of one percent per year of $ - 0 -
fee to affiliates Partnership assets under management
(valued at cost), subordinated to
certain minimum returns to the
Limited Partners. The property
management fee will not exceed the
lesser of one percent of gross
operating revenues or competitive
fees for comparable services. Due
to the fact that these fees are
non-cumulative if the Limited
Partners do not receive their 10%
Preferred Return in any particular
year no property management fees
will be due or payable for such
year.
<PAGE>
Amount Incurred
Type of Compensation Method of For the Year
and Recipient Computation Ended December 31, 1998
------------- ----------- -----------------------
Deferred, subordinated real estate A deferred, subordinated real $45,150
disposition fee payable to affiliates estate disposition fee, payable
upon sale of one or more
Properties, in an amount equal to
the lesser of (i) one-half of a
competitive real estate
commission, or (ii) three percent
of the sales price of such
Property or Properties. Payment of
such fee shall be made only if
affiliates of the General Partners
provides a substantial amount of
services in connection with the
sale of a Property or Properties
and shall be subordinated to
certain minimum returns to the
Limited Partners. However, if the
net sales proceeds are reinvested
in a replacement Property, no such
real estate disposition fee will
be incurred until such replacement
Property is sold and the net sales
proceeds are distributed.
General Partners' deferred, A deferred, subordinated share $ - 0 -
sub-ordinated share of Partnership net equal to one percent of Partnership
cash flow distributions of net cash flow,
subordinated to certain minimum
returns to the Limited Partners.
General Partners' deferred, A deferred, subordinated share $ - 0 -
sub-ordinated share of Partnership net equal to five percent of the
sales proceeds from a sale or sales not Partnership distributions of such
in liquidation of the Partnership net sales proceeds, subordinated to
certain minimum returns to the
Limited Partners.
<PAGE>
Amount Incurred
Type of Compensation Method of For the Year
and Recipient Computation Ended December 31, 1998
------------- ----------- -----------------------
General Partners' share of Partnership Distributions of net sales proceeds $ - 0 -
net sales proceeds from a sale or sales from a sale or sales of
not in liquidation of the Partnership substantially all of the
Partnership's assets will be
distributed in the following order
or priority: (i) first, to pay all
debts and liabilities of the
Partnership and to establish
reserves; (ii) second, to Partners
with positive capital account
balances, determined after the
allocation of net income, net
loss, gain and loss, in proportion
to such balances, up to amounts
sufficient to reduce such balances
to zero; and (iii) thereafter, 95%
to the Limited Partners and 5% to
the General Partners.
</TABLE>
As discussed above in Item 8. Financial Statements and Supplementary
Data -- Note 12. Subsequent Event, the Registrant has entered into an Agreement
and Plan of Merger, dated March 11, 1999, with APF pursuant to which the
Registrant would be merged with and into a subsidiary of APF in exchange for the
issuance of APF Shares. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger. If
the Merger is approved by Limited Partners holding units greater than 50% of the
outstanding units of the Registrant, the General Partners of the Registrant
would receive certain benefits. For instance, following the Merger, James M.
Seneff, Jr. and Robert A. Bourne, the individual General Partners, will continue
to serve as directors of APF, with Mr. Seneff serving as Chairman and Mr. Bourne
serving as Vice Chairman. As APF directors, they may also be entitled to receive
stock options under any stock option plan adopted by APF.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Accountants
Balance Sheets at December 31, 1998 and 1997
Statements of Income for the years ended December 31, 1998,
1997, and 1996
Statements of Partners' Capital for the years ended December
31, 1998, 1997, and 1996
Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1998, 1997, and 1996
Schedule III - Real Estate and Accumulated Depreciation at
December 31, 1998
Notes to Schedule III - Real Estate and Accumulated
Depreciation at December 31, 1998
Schedule IV - Mortgage Loans on Real Estate at December 31,
1998
All other Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or
notes thereto.
3. Exhibits
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.)
<PAGE>
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.)
(b) The Registrant filed no reports on Form 8-K during the period from
October 1, 1998 through December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 30th day of
March, 1999.
CNL INCOME FUND II, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
JAMES M. SENEFF, JR.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
/s/ Robert A. Bourne President, Treasurer and Director March 30, 1999
Robert A. Bourne (Principal Financial and
Accounting Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director March 30, 1999
James M. Seneff, Jr. (Principal Executive Officer)
<PAGE>
</TABLE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
<S> <C>
Additions Deductions
------------------------------- ------------------------------
Collected
or Deter-
Balance at Charged to Charged to Deemed mined to Balance
Beginning Costs and Other Uncollec- be Col- at End
Year Description of Year Expenses Accounts tible lectible of Year
- -------- ---------------- ------------- ------------- -------------- ------------ ----------- -----------
1996 Allowance for
doubtful
accounts $ 100,811 $ -- $ 64,323 (b) $17,832 (c) $21,266 $ 126,036
(a)
============= ============= ============== ============ =========== ===========
1997 Allowance for
doubtful
accounts $126,036 $ -- $ 5,677 (b) $30,062 (c) $18,397 $ 83,254
(a)
============= ============= ============== ============ =========== ===========
1998 Allowance for
doubtful
accounts $ 83,254 $ -- $ 70 (b) $ 7,205 (c) $20,684 $55,435
(a)
============= ============= ============== ============ =========== ===========
</TABLE>
(a) Deducted from receivables on the balance sheet.
(b) Reduction of rental and other income.
(c) Amounts written off as uncollectible.
<PAGE>
<TABLE>
<CAPTION>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<S> <C>
Costs Capitalized
Subsequent to
Initial Cost Acquisition
-------------------------- -------------------
Encum- Buildings and Improve- Carrying
brances Land Improvements ments Costs
----------- ---------- ------------- --------- -------
Properties the Partnership
has Invested in:
Burger King Restaurant:
San Antonio, Texas - $373,095 $384,458 - -
Checkers Drive-In Restaurants:
Fayetteville, Georgia - 338,735 - - -
Atlanta, Georgia - 317,128 - - -
Denny's Restaurants:
Casper, Wyoming - 184,285 415,181 - -
Rock Springs, Wyoming - 217,448 488,991 - -
Golden Corral Family
Steakhouse Restaurants:
Tomball, Texas - 311,019 529,759 22,330 -
Pineville, Louisiana (e) - 187,961 503,435 - -
Hueytown, Alabama - 258,084 513,853 - -
Nederland, Texas - 327,473 520,701 - -
Columbia, Missouri - 384,911 163,164 - -
Jack in the Box Restaurant:
Lubbock, Texas - 229,198 408,702 - -
KFC Restaurants:
Jacksonville, Florida - 198,735 266,200 - -
Eagan, Minnesota - 202,084 370,247 31,976 -
Bay City, Texas - 162,783 - 305,154 -
Lonestar Steakhouse &
Saloon Restaurant:
Sterling Heights, Michigan (f) - 430,281 - 648,736 -
Pizza Hut Restaurants:
Clayton, New Mexico - 54,093 200,141 - -
Santa Rosa, New Mexico - 75,963 168,204 - -
Childress, Texas - 71,512 145,191 - -
Coleman, Texas - 70,208 141,004 - -
Ponderosa Steakhouse Restaurant:
Scottsburg, Indiana - 208,781 - 518,884 -
Popeyes Famous Fried
Chicken Restaurants:
Altamonte Springs, Florida - 197,959 255,965 - -
Ocala, Florida - 184,512 274,991 - -
Sanford, Florida - 237,243 359,865 - -
Apopka, Florida - 155,041 - 417,209 -
Wendy's Old Fashioned
Hamburger Restaurants:
Gainesville, Texas - 166,302 449,914 - -
Vail, Colorado - 782,609 - 550,346 -
Other:
Oxford, Alabama (g) - 152,567 355,990 - -
Littleton, Colorado (h) - 42,873 310,832 - -
Lombard, Illinois (i) - 85,517 96,207 40,633 -
------------ ----------- ------------ -------
$6,608,400 $7,322,995 $2,535,268 -
============ =========== ============ =======
Property of Joint Venture in Which
the Partnership has a 50% Interest and
has Invested in Under an Operating Lease:
Pizza Hut Restaurant:
Orlando, Florida - $330,568 $220,588 - -
============ =========== ============ =======
Property of Joint Venture in Which the
Partnership has a 49% Interest and has
Invested in Under an Operating Lease:
Denny's Restaurant:
Holland, Michigan - $295,987 - $780,451 -
============ =========== ============ =======
Property of Joint Venture in Which the
Partnership has a 64% Interest and has
Invested in Under an Operating Lease:
Darryl's Restaurant:
Greensboro, North Carolina - $261,013 - - -
============ =========== ============ =======
Property in Which the Partnership
has a 33.87% Interest as Tenants-
In-Common and has Invested
in Under an Operating Lease
Arby's Restaurant:
Arvada, Colorado (m) - $260,439 $545,126 - -
============ =========== ============ =======
Property in Which the Partnership has
a 57.9129% Interest as Tenants-in-Common
and has Invested in Under an Operating Lease:
Boston Market Restaurant:
Mesa, Arizona (l) - $440,843 $650,622 - -
============ =========== ============ =======
Property in Which the Partnership has a 47%
Interest as Tenants- In Common and
has Invested in Under an Operating Lease:
Golden Corral Restaurant:
Smithfield, North Carolina - $264,272 $1,155,018 - -
============ =========== ============ =======
Property in Which the Partnership has a
37.01% Interest as Tenants-in-Common
and has Invested in Under an Operating Lease:
Chevy's Fresh Mex Restaurant:
Vancouver, Washington - $875,659 $1,389,366 - -
============ =========== ============ =======
Property of in Which the Partnership has
a 13.38% Interest as Tenants- In-Common
and has Invested in Under an Operating Lease:
IHOP Restaurant
Memphis, Tennessee - $678,890 $825,076 - -
============ =========== ============ =======
Property of Joint Venture in
Which the Parnership has a
64% Interest has Invested in
Under a Direct Financing Lease:
Darryl's Restaurant:
Greensboro, North Carolina - - $521,400 - -
============ =========== ============ =======
Property in Which the Partnership has a
39.39% Interest as Tenants- In-Common and
has Invested in Under a Direct Financing Lease:
IHOP Restaurant
Overland Park, Kansas - $335,374 $1,273,134 - -
============ =========== ============ =======
Gross Amount at Which Life on Which
Carried at Close of Period (c) Depreciation in
------------------------------------- Date Latest Income
Buildings and Accumulated of Con- Date Statement is
Land Improvements Total Depreciation struction Acquired Computed
--------- ------------ ----------- ----------- --------- -------- ------------
$373,095 $384,458 $757,553 $147,376 1987 07/87 (b)
338,735 - 338,735 (d) - 12/94 (d)
317,128 - 317,128 (d) - 12/94 (d)
184,285 415,181 599,466 156,846 1983 09/87 (b)
217,448 488,991 706,439 184,730 1983 09/87 (b)
311,019 552,089 863,108 213,488 1987 05/87 (b)
187,961 503,435 691,396 194,382 1987 06/87 (b)
258,084 513,853 771,937 198,405 1987 06/87 (b)
327,473 520,701 848,174 198,156 1987 08/87 (b)
384,911 163,164 548,075 60,734 1987 11/87 (b)
229,198 408,702 637,900 74,014 1993 07/93 (b)
198,735 266,200 464,935 100,564 1983 09/87 (b)
202,084 402,223 604,307 150,834 1987 10/87 (b)
162,783 305,154 467,937 112,737 1987 12/87 (b)
430,281 648,736 1,079,017 234,266 1988 08/87 (b)
54,093 200,141 254,234 76,165 1986 08/87 (b)
75,963 168,204 244,167 64,011 1986 08/87 (b)
71,512 145,191 216,703 55,253 1974 08/87 (b)
70,208 141,004 211,212 52,093 1977 12/87 (b)
208,781 518,884 727,665 187,375 1988 10/87 (b)
197,959 255,965 453,924 101,675 1987 02/87 (b)
184,512 274,991 459,503 109,233 1987 02/87 (b)
237,243 359,865 597,108 138,948 1987 06/87 (b)
155,041 417,209 572,250 152,398 1988 09/87 (b)
166,302 449,914 616,216 172,467 1986 07/87 (b)
782,609 550,346 1,332,955 209,437 1987 08/87 (b)
152,567 355,990 508,557 129,040 1987 02/88 (b)
42,873 310,832 353,705 116,562 1973 10/87 (b)
85,517 136,840 222,357 40,170 1973 10/87 (b)
- ---------- ------------ ------------ -----------
$6,608,400 $9,858,263 $16,466,663 $3,631,359
========== ============ ============ ===========
$330,568 $220,588 $551,156 $82,415 1987 10/87 (b)
========== ============ ============ ===========
$295,987 $780,451 $1,076,438 $264,486 1988 10/87 (b)
========== ============ ============ ===========
$261,013 (k) $261,013 - 1987 07/87 (j)
========== ============ ===========
$260,439 $545,126 $805,565 $77,712 1994 09/94 (b)
========== ============ ============ ===========
$440,843 $650,622 $1,091,465 $25,836 1997 10/97 (b)
========== ============ ============ ===========
$264,272 $1,155,018 $1,419,290 $39,450 1996 12/97 (b)
========== ============ ============ ===========
$875,659 $1,389,366 $2,265,025 $46,437 1994 12/97 (b)
========== ============ ============ ===========
$678,890 $825,076 $1,503,966 $26,642 1997 01/98 (b)
========== ============ ============ ===========
(k) (k) (j) 1974 06/97 (j)
==========
- (k) (k) (j) 1997 01/98 (j)
==========
</TABLE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(a) Transactions in real estate and accumulated depreciation during 1998,
1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
------------------ ------------------
<S> <C>
Properties the Partnership has Invested in:
Balance, December 31, 1995 $ 20,579,247 $ 3,398,315
Additional costs capitalized 40,633 --
Depreciation expense -- 417,776
------------------ ------------------
Balance, December 31, 1996 20,619,880 3,816,091
Dispositions (4,153,217) (909,833)
Depreciation expense -- 395,837
------------------ ------------------
Balance, December 31, 1997 16,466,663 3,302,095
Depreciation expense -- 329,264
------------------ ------------------
Balance, December 31, 1998 $ 16,466,663 $ 3,631,359
================== ==================
Property of Joint Venture in Which the Partnership has a 50%
Interest:
Balance, December 31, 1995 $ 551,156 $ 60,356
Depreciation expense -- 7,353
------------------ ------------------
Balance, December 31, 1996 551,156 67,709
Depreciation expense -- 7,353
------------------ ------------------
Balance, December 31, 1997 551,156 75,062
Depreciation expense -- 7,353
------------------ ------------------
Balance, December 31, 1998 $ 551,156 $ 82,415
================== ==================
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 1998
Accumulated
Cost Depreciation
------------------ ------------------
Property of Joint Venture in Which
the Partnership has a 49%
Interest:
Balance, December 31, 1995 $ 1,076,438 $ 186,441
Depreciation expense -- 26,015
------------------ ------------------
Balance, December 31, 1996 1,076,438 212,456
Depreciation expense -- 26,015
------------------ ------------------
Balance, December 31, 1997 1,076,438 238,471
Depreciation expense -- 26,015
------------------ ------------------
Balance, December 31, 1998 $ 1,076,438 $ 264,486
================== ==================
Property of Joint Venture in Which
the Partnership has a 64%
Interest:
Balance, December 31, 1995 $ 721,893 $ 147,919
Depreciation expense -- 20,846
------------------ ------------------
Balance, December 31, 1996 721,893 168,765
Acquisition 261,013 --
Depreciation expense -- 1,713
Disposition (721,893) (170,478)
------------------ ------------------
Balance, December 31, 1997 261,013 --
Depreciation expense -- --
------------------ ------------------
Balance, December 31, 1998 $ 261,013 $ --
================== ==================
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 1998
Accumulated
Cost Depreciation
------------------ ------------------
Property in Which the Partnership
has a 33.87% Interest as
tenants-in-common:
Balance, December 31, 1995 $ 805,565 $ 23,199
Depreciation expense -- 18,171
------------------ ------------------
Balance, December 31, 1996 805,565 41,370
Depreciation expense -- 18,171
------------------ ------------------
Balance, December 31, 1997 805,565 59,541
Depreciation expense -- 18,171
------------------ ------------------
Balance, December 31, 1998 $ 805,565 $ 77,712
================== ==================
Property in Which the Partnership has
a 57.9129% Interest as tenants-in-
common and had Invested in Under an
Operating Lease:
Balance, December 31, 1996 $ -- $ --
Acquisitions 1,091,465 --
Depreciation expense -- 4,021
------------------ ------------------
Balance, December 31, 1997 1,091,465 4,021
Depreciation expense -- 21,815
------------------ ------------------
Balance, December 31, 1998 $ 1,091,465 $ 25,836
================== ==================
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 1998
Accumulated
Cost Depreciation
------------------ ------------------
Property in Which the Partnership has
a 47% Interest as tenants-in-common
and had Invested in Under an Operating
Lease:
Balance, December 31, 1996 $ -- $ --
Acquisitions 1,419,290 --
Depreciation expense -- 949
------------------ ------------------
Balance, December 31, 1997 1,419,290 949
Depreciation expense -- 38,501
------------------ ------------------
Balance, December 31, 1998 $ 1,419,290 $ 39,450
================== ==================
Property in Which the Partnership has a
37.01% Interest as tenants-in-common
and had Invested in Under an Operating
Lease:
Balance, December 31, 1996 $ -- $ --
Acquisitions 2,265,025 --
Depreciation expense -- 127
------------------ ------------------
Balance, December 31, 1997 2,265,025 127
Depreciation expense -- 46,310
------------------ ------------------
Balance, December 31, 1998 $ 2,265,025 $ 46,437
================== ==================
Property in Which the Partnership has a 13.38% Interest as
tenants-in-common and had Invested in Under an Operating
Lease:
Balance, December 31, 1997 $ -- $ --
Acquisitions 1,503,966 --
Depreciation expense -- 26,642
------------------ ------------------
Balance, December 31, 1998 $ 1,503,966 $ 26,642
================== ==================
</TABLE>
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 1998
(b) Depreciation expense is computed for buildings and
improvements based upon estimated lives of 30 years.
(c) As of December 31, 1998, the aggregate cost of the
Properties owned by the Partnership and the joint ventures
(including the Properties held as tenants-in-common) for
federal income tax purposes was $16,420,257 and $5,091,168,
respectively. All of the leases are treated as operating
leases for federal income tax purposes.
(d) The building portion of this Property is owned by the
tenant; therefore, depreciation is not applicable.
(e) The tenant of this Property, Golden Corral Corporation, has
subleased this Property to a local, independent restaurant.
Golden Corral Corporation continues to be responsible for
complying with all the terms of the lease agreement and is
continuing to pay rent on this Property to the Partnership.
(f) The restaurant in Sterling Heights, Michigan, was converted
from a Ponderosa Steakhouse Restaurant to a Lonestar
Steakhouse & Saloon Restaurant in 1994.
(g) The restaurant in Oxford, Alabama, was converted from a KFC
Restaurant to a regional, independent restaurant in 1993.
(h) The restaurant in Littleton, Colorado, was converted from a
Taco Bell restaurant to a local, independent restaurant in
1995.
(i) The restaurant in Lombard, Illinois, was converted from a
Taco Bell restaurant to a Great Clips hair salon in 1996.
(j) For financial reporting purposes, the portion of the lease
relating to the building has been included in net investment
in direct financing leases; therefore, depreciation is not
applicable.
(k) For financial reporting purposes, certain components of the
lease relating to the land and building have been recorded
as a direct financing lease. Accordingly, costs relating to
these components of this lease are not shown.
(l) During the year ended December 31, 1997, the Partnership and
an affiliate as tenants-in-common, purchased land and
building from CNL BB Corp., an affiliate of the General
Partners, for an aggregate cost of $1,091,465.
(m) The Property was converted from a Kenny Rogers Roasters
restaurant to an Arby's Restaurant during 1996.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount
of Loans
Carrying Subject to
Final Periodic Face Amount of Delinquent
Interest Maturity Payment Prior Amount of Mortgages Principal
Description Rate Date Terms Liens Mortgages (1) or Interest
---------------- ---------- --------------- --------- --------- ------------ ----------- --------------
<S> <C>
KFC
Eagan, MN
First Mortgage 10.50% December 1998 (1) $ -- $ 42,000 $ 6,872 $ --
--------- ------------ ----------- --------------
Total $ -- $ 42,000 $ 6,872 $ --
========= ============ =========== ==============
(1) Monthly payments of interest only at an annual rate of 10.50%.
Beginning July 1, 1998, monthly payments of principal and interest at
an annual rate of 10.50%.
(2) The tax carrying value of the notes is approximately $6,870.
(3) The changes in the carrying amounts are summarized as follows:
1998 1997 1996
--------------- --------------- ---------------
Balance at beginning of
period $ 42,734 $ -- $ --
New mortgage loans -- 42,000 --
Interest earned 3,113 2,572 --
Collection of principal and
interest (38,975) (1,838) --
--------------- --------------- ---------------
Balance at end of period $ 6,872 $ 42,734 $ --
=============== =============== ===============
</TABLE>
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT INDEX
Exhibit Number
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.)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund II, Ltd. at December 31, 1998, and its statement of
income for the year then ended and is qualified in its entirety by reference to
the Form 10-K of CNL Income Fund II, Ltd. for the year ended December 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 889,891
<SECURITIES> 0
<RECEIVABLES> 177,995
<ALLOWANCES> 55,435
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 16,466,663
<DEPRECIATION> 3,631,359
<TOTAL-ASSETS> 18,392,911
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,640,881
<TOTAL-LIABILITY-AND-EQUITY> 18,392,911
<SALES> 0
<TOTAL-REVENUES> 1,905,440
<CGS> 0
<TOTAL-COSTS> 558,525
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,733,739
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,733,739
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,733,739
<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>
