FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended March 31, 1999
--------------------------------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the transition period from ___________________ to ____________________
Commission file number
0-16824
---------------------------------------
CNL Income Fund II, Ltd.
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2733859
- ------------------------------------------ ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East South Street
Orlando, Florida 32801
- ------------------------------------------ ------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
<PAGE>
CONTENTS
Page
Part I.
Item 1. Financial Statements:
Condensed Balance Sheets
Condensed Statements of Income
Condensed Statements of Partners' Capital
Condensed Statements of Cash Flows
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Part II.
Other Information
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------- -------------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,651,736 and
$3,631,359 $ 12,266,850 $ 12,835,304
Investment in joint ventures 4,342,183 4,353,427
Mortgage note receivable -- 6,872
Cash and cash equivalents 899,137 889,891
Restricted cash 678,175 --
Receivables, less allowance for doubtful accounts
of $68,675 and $55,435 61,742 122,560
Prepaid expenses 7,789 4,801
Lease costs, less accumulated amortization of
$15,621 and $14,889 4,942 5,674
Accrued rental income 179,999 174,382
------------------- -------------------
$ 18,440,817 $ 18,392,911
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 33,821 $ 4,621
Escrowed real estate taxes payable 10,191 8,065
Distributions payable 515,629 515,629
Due to related parties 169,101 183,303
Rents paid in advance and deposits 23,200 40,412
------------------- -------------------
Total liabilities 751,942 752,030
Partners' capital 17,688,875 17,640,881
------------------- -------------------
$ 18,440,817 $ 18,392,911
=================== ===================
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998
-------------- ---------------
<S> <C>
Revenues:
Rental income from operating leases $ 420,201 $ 432,820
Interest and other income 13,671 22,954
-------------- ---------------
433,872 455,774
-------------- ---------------
Expenses:
General operating and administrative 35,824 29,926
Professional services 3,517 5,716
State and other taxes 15,526 14,565
Depreciation and amortization 83,049 83,312
Transaction costs 32,324 --
-------------- ---------------
170,240 133,519
-------------- ---------------
Income Before Equity in Earnings of Joint Ventures,
Gain on Sale of Land and Building, and Real
Estate Disposition Fees 263,632 322,255
Equity in Earnings of Joint Ventures 107,239 109,416
Gain on Sale of Land and Building 192,752 --
Real Estate Disposition Fees -- (45,150 )
-------------- ---------------
Net Income $ 563,623 $ 386,521
============== ===============
Allocation of Net Income:
General partners $ 4,328 $ 4,317
Limited partners 559,295 382,204
-------------- ---------------
$ 563,623 $ 386,521
============== ===============
Net Income Per Limited Partner Unit $ 11.19 $ 7.64
============== ===============
Weighted Average Number of Limited Partner
Units Outstanding 50,000 50,000
============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------------- ------------------
<S> <C>
General partners:
Beginning balance $ 390,900 $ 373,111
Net income 4,328 17,789
------------------- ------------------
395,228 390,900
------------------- ------------------
Limited partners:
Beginning balance 17,249,981 18,828,538
Net income 559,295 1,715,950
Distributions ($10.31 and $65.89 per
limited partner unit, respectively) (515,629 ) (3,294,507 )
------------------- ------------------
17,293,647 17,249,981
------------------- ------------------
Total partners' capital $ 17,688,875 $ 17,640,881
=================== ==================
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998
-------------- --------------
<S> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 518,058 $ 596,047
-------------- --------------
Cash Flows from Investing Activities:
Proceeds from sale of land and building 677,678 --
Investment in joint ventures -- (834,888 )
Decrease (Increase) in restricted cash (677,678 ) 1,432,422
Collections on mortgage note receivable 6,817 --
-------------- --------------
Net cash provided by investing activities 6,817 597,534
-------------- --------------
Cash Flows from Financing Activities:
Distributions to limited partners (515,629 ) (594,000 )
-------------- --------------
Net cash used in financing activities (515,629 ) (594,000 )
-------------- --------------
Net Increase in Cash and Cash Equivalents 9,246 599,581
Cash and Cash Equivalents at Beginning of Quarter 889,891 470,194
-------------- --------------
Cash and Cash Equivalents at End of Quarter $ 899,137 $1,069,775
============== ==============
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Deferred real estate disposition fees incurred
and unpaid at end of quarter $ -- $ 45,150
============== ==============
Distributions declared and unpaid at end of
quarter $ 515,629 $1,747,628
============== ==============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter ended March 31, 1999 may not be indicative of the results
that may be expected for the year ending December 31, 1999. Amounts as
of December 31, 1998, included in the financial statements, have been
derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund II, Ltd. (the "Partnership") for the year ended December
31, 1998.
2. Land and Buildings on Operating Leases:
In March 1999, the Partnership sold its property in Columbia, Missouri,
to a third party for $682,500 and received net sales proceed of
$677,678, resulting in a gain of $192,752 for financial reporting
purposes. This property was originally acquired by the Partnership in
November 1987 and had a cost of approximately $511,200, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $166,500 in excess of
its original purchase price.
3. Restricted Cash:
As of March 31, 1999, the net sales proceeds of $677,678 from the sale
of the property in Columbia, Missouri, plus accrued interest of $497
were being held in an interest-bearing escrow account pending the
release of funds to acquire an additional property.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
4. Merger Transaction:
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 share
(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 the previous offerings, the most recent
of which was completed in December 1998. 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. If the limited partners at the
special meeting approve the Merger, APF will own the Properties and
other assets of the Partnership. The general partners intend to
recommend that the limited partners of the Partnership approve the
Merger. In connection with their recommendation, the general partners
will solicit the consent of the limited partners at the special
meeting. If the limited partners reject the Merger, the Partnership
will bear the portion of the transaction costs based upon the
percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
On May 5, 1999, four limited partners in several of the CNL Income
Funds filed a lawsuit against the general partners and APF in
connection with the proposed Merger (see Part II - Item 1. Legal
Proceedings). The general partners and APF believe that the lawsuit is
without merit and intend to defend vigorously against the claims.
Because the lawsuit was so recently filed, it is premature to further
comment on the lawsuit at this time.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
5. Concentration of Credit Risk:
The following schedule presents total rental and mortgage interest
income from individual lessees, each representing more than ten percent
of the Partnership's total rental income (including the Partnership's
share of rental income from joint ventures and the properties held as
tenants-in-common with affiliates) for each of the quarters ended March
31:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C>
Golden Corral Corporation $107,153 $91,728
Restaurant Management Services, Inc. 57,110 57,110
</TABLE>
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 quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C>
Golden Corral Family Steakhouse
Restaurants $107,153 $109,668
Popeyes Famous Fried Chicken
Restaurants 57,110 57,110
Wendy's Old Fashioned Hamburger
Restaurants 54,948 56,273
</TABLE>
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>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CNL Income Fund II, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on November 13, 1986 to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurant properties, as well as land upon which restaurants were to
be constructed, which are leased primarily to operators of national and regional
fast-food restaurant chains (collectively, the "Properties"). The leases
generally are triple-net leases, with the lessees responsible for all repairs
and maintenance, property taxes, insurance and utilities. As of March 31, 1999,
the Partnership owned 37 Properties, which included interest 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.
Liquidity and Capital Resources
During the quarters ended March 31, 1999 and 1998, the Partnership
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses) of $518,058 and $596,047, respectively. The decrease in
cash from operations for the quarter ended March 31, 1999, as compared to the
quarter ended March 31, 1998, is primarily a result of changes in the
Partnership's working capital and changes in income and expenses as described in
"Results of Operations" below.
Other sources and uses of capital included the following during the
quarter ended March 31, 1999.
In March 1999, the Partnership sold its Property in Columbia, Missouri
for $682,500 and received net sales proceeds of $677,678, resulting in a gain of
$192,752 for financial reporting purposes. This Property was originally acquired
by the Partnership in November 1987 and had a cost of approximately $511,200,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the Property for approximately $166,500 in excess of its
original purchase price. As of March 31, 1999, the net sales proceeds of
$677,678 plus accrued interest of $497, were being held in an interest-bearing
escrow account pending the release of funds to acquire an additional Property.
The general partners believe that the transaction, or a portion thereof,
relating to the sale of the Property in Columbia, Missouri, and the reinvestment
of the net sales proceeds, will qualify as a like-kind exchange transaction for
federal income tax purposes. However, the Partnership will distribute amounts
sufficient to enable the limited partners to pay federal and state income taxes,
if any (at a level reasonably assumed by the general partners), resulting from
the sale.
Currently, rental income from the Partnership's Properties is invested
in money market accounts or other short-term, highly liquid investments pending
the Partnership's use of such funds to pay Partnership expenses or to make
distributions to the partners. At March 31, 1999, the Partnership had $899,137
invested in such short-term investments, as compared to $889,891 at December 31,
1998. The funds remaining at March 31, 1999, after payment of distributions and
other liabilities, will be used to meet the Partnership's working capital and
other needs.
<PAGE>
Liquidity and Capital Resources - Continued
Total liabilities of the Partnership, including distributions payable,
decreased to $751,942 at March 31, 1999 from $752,030 at December 31, 1998. The
general partners believe the Partnership has sufficient cash on hand to meet its
current working capital needs.
Based on current cash from operations, and for the quarter ended March
31, 1998, a portion of the proceeds received from the 1997 sales of two
Properties in Avon Park, Florida and Farmington Hills, Michigan, the Partnership
declared distributions to limited partners of $515,629 and $1,747,628 for the
quarters ended March 31, 1999 and 1998, respectively. This represents
distributions of $10.31 and $34.95 per unit for the quarters ended March 31,
1999 and 1998, respectively. Distributions for the quarter ended March 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. 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 and are expected to remain fixed. Therefore,
distributions of net cash flow were adjusted during 1998. No distributions were
made to the general partners for the quarters ended March 31, 1999 and 1998. No
amounts distributed to the limited partners for the quarters ended March 31,
1999 and 1998 are required to be or have been treated by the Partnership as a
return of capital for purposes of calculating the limited partners' return on
their adjusted capital contributions. The Partnership intends to continue to
make distributions of cash available for distribution to the limited partners on
a quarterly basis.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with APF pursuant to which the Partnership would be merged with and
into a subsidiary of APF (the "Merger"). 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. 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 three previous public offerings, the most recent of which
was completed in December 1998. 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
<PAGE>
Liquidity and Capital Resources - Continued
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. If the limited partners at the special
meeting approve the Merger, APF will own the Properties and other assets of the
Partnership. The general partners intend to recommend that the limited partners
of the Partnership approve the Merger. In connection with their recommendation,
the general partners will solicit the consent of the limited partners at the
special meeting. If the limited partners reject the Merger, the Partnership will
bear the portion of the transaction costs based upon the percentage of "For"
votes and the general partners will bear the portion of such transaction costs
based upon the percentage of "Against" votes and abstentions.
On May 5, 1999, four limited partners in several of the CNL Income
Funds filed a lawsuit against the general partners and APF in connection with
the proposed Merger (see Part II - Item 1. Legal Proceedings). The general
partners and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. Because the lawsuit was so recently filed, it is
premature to further comment on the lawsuit at this time.
Results of Operations
During the quarters ended March 31, 1999 and 1998, the Partnership
owned and leased 29 wholly owned Properties (which included one Property in
Columbia, Missouri which was sold in March 1999), to operators of fast-food and
family-style restaurant chains. In connection therewith, during the quarters
ended March 31, 1999 and 1998, the Partnership earned $420,201 and $432,820,
respectively, in rental income from these Properties. Rental income decreased
during the quarter ended March 31, 1999, as compared to the quarter ended March
31, 1998, primarily as a result of the Partnership establishing an allowance for
doubtful accounts of approximately $12,300 for past due rental amounts relating
to the Properties in Casper and Rock Springs, Wyoming in accordance with the
Partnership's collection policy. The general partners will continue to pursue
collection of past due rental amounts relating to these Properties and will
recognize such amounts as income if collected.
For the quarters ended March 31, 1999 and 1998, the Partnership also
owned and leased three Properties indirectly through joint venture arrangements
and six Properties as tenants-in-common with affiliates of the general partners.
In connection therewith, during the quarters ended March 31, 1999 and 1998, the
Partnership earned $107,239 and $109,416, respectively, attributable to net
income earned by these joint ventures.
During the quarter ended March 31, 1999, 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 and
mortgage interest income (including the Partnership's share of
<PAGE>
Results of Operations - Continued
rental income from three Properties owned by joint ventures and six Properties
owned with affiliate as tenants-in-common). As of March 31, 1999, Golden Corral
Corporation was the lessee under leases relating to five 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. In addition,
during the quarter ended March 31, 1999, three restaurant chains, Golden Corral,
Wendy's, 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). It is
anticipated that these three 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, were
$170,240 and $133,519 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in operating expenses during the quarter ended March
31, 1999, as compared to the quarter ended March 31, 1998, was partially due to
the Partnership incurring $32,324 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.
During the quarter ended March 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 quarter ended March 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 quarter
ended March 31, 1998. The payment of these fees is subordinated to the limited
partners receiving their cumulative 10 percent preferred return and their
adjusted capital contribution. No such fees were recorded during the quarter
ended March 31, 1999.
As a result of the sale of the Property in Columbia, Missouri, as
described above in "Liquidity and Capital Resources," the Partnership recognized
a gain of $192,752 for financial reporting purposes during the quarter ended
March 31, 1999. No Properties were sold during the quarter ended March 31, 1998.
<PAGE>
Year 2000 Readiness Disclosure
The Year 2000 problem concerns the inability of information and
non-information technology systems to properly recognize and process date
sensitive information beyond January 1, 2000. The Partnership does not have any
information or non-information technology systems. The general partners and
affiliates of the general partners provide all services requiring the use of
information and non-information technology systems pursuant to a management
agreement with the Partnership. The information technology system of the
affiliates of the general partners consists of a network of personal computers
and servers built using hardware and software from mainstream suppliers. The
non-information technology systems of the affiliates of the general partners are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. The affiliates
of the general partners have no internally generated programmed software coding
to correct, because substantially all of the software utilized by the general
partners and affiliates is purchased or licensed from external providers. The
maintenance of non-information technology systems at the Partnership's
Properties is the responsibility of the tenants of the Properties in accordance
with the terms of the Partnership's leases.
In early 1998, the general partners and affiliates formed a Year 2000
committee (the "Y2K Team") for the purpose of identifying, understanding and
addressing the various issues associated with the Year 2000 problem. The Y2K
Team consists of the general partners and members from the affiliates of the
general partners, including representatives from senior management, information
systems, telecommunications, legal, office management, accounting and property
management. The Y2K Team's initial step in assessing the Partnership's Year 2000
readiness consists of identifying any systems that are date-sensitive and,
accordingly, could have potential Year 2000 problems. The Y2K Team is in the
process of conducting inspections, interviews and tests to identify which of the
Partnership's systems could have a potential Year 2000 problem.
The information system of the affiliates of the general partners is
comprised of hardware and software applications from mainstream suppliers.
Accordingly, the Y2K Team is in the process of contacting the respective vendors
and manufacturers to verify the Year 2000 compliance of their products. In
addition, the Y2K Team has also requested and is evaluating documentation from
other companies with which the Partnership has a material third party
relationship, including the Partnership's tenants, vendors, financial
institutions and the Partnership's 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. The Y2K Team has also requested and is evaluating documentation
from the non-information technology systems providers of the affiliates of the
general partners. Although the general partners continue to receive positive
responses from the Companies with which the Partnership has third party
relationships regarding their Year 2000 compliance, the general partners cannot
be assured that the tenants, financial institutions, transfer agent, other
vendors and system providers have adequately considered the impact of the Year
2000. The general partners are not able to measure the effect on the operations
of the Partnership of any third party's failure to adequately address the impact
of the Year 2000.
<PAGE>
Year 2000 Readiness Disclosure - Continued
The general partners and their affiliates have identified and have
implemented upgrades for certain hardware equipment. In addition, the general
partners and their affiliates have identified certain software applications
which will require upgrades to become Year 2000 compliant. The general partners
expect all of these upgrades, as well as any other necessary remedial measures
on the information technology systems used in the business activities and
operations of the Partnership, to be completed by September 30, 1999, although,
the general partners cannot be assured that the upgrade solutions provided by
the vendors have addressed all possible Year 2000 issues. The general partners
do not expect the aggregate cost of the Year 2000 remedial measures to be
material to the results of operations of the Partnership.
The general partners and affiliates have received certification from
the Partnership's transfer agent of its Year 2000 compliance. Due to the
material relationship of the Partnership with its transfer agent, the Y2K Team
is evaluating the Year 2000 compliance of the systems of the transfer agent and
expects to have the evaluation completed by September 30, 1999. Despite the
positive response from the transfer agent and the evaluation of the transfer
agent's system by the Y2K Team, the general partners cannot be assured that the
transfer agent has addressed all possible Year 2000 issues. In the event that
the systems of the transfer agent are not Year 2000 compliant, the general
partners and their affiliates would have to allocate resources to internally
perform the functions of the transfer agent. The general partners do not
anticipate that the additional cost of these resources would have a material
impact on the Partnership.
Based upon the progress the general partners and affiliates have made
in addressing the Year 2000 issues and their plan and timeline to complete the
compliance program, the general partners do not foresee significant risks
associated with Year 2000 compliance at this time. The general partners and
their affiliates plan to address their significant Year 2000 issues prior to the
Partnership being affected by them; therefore, they have not developed a
comprehensive contingency plan. However, if the general partners and their
affiliates identify significant risks related to their Year 2000 compliance, or
if their progress deviates from the anticipated timeline, the general partners
and their affiliates will develop contingency plans as deemed necessary at that
time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On May 5, 1999, four limited partners in several of the CNL Income
Funds filed a lawsuit, Jon Hale, Mary J. Hewitt, Charles A.
Hewitt, and Gretchen M. Hewitt v. James M. Seneff, Jr., Robert A.
Bourne, CNL Realty Corporation, and CNL American Properties Fund,
Inc., Case No. CIO-99-0003561, in the Circuit Court of the Ninth
Judicial Circuit of Orange County, Florida, alleging that the
Messrs. Seneff and Bourne and CNL Realty Corporation, as general
partners of the CNL Income Funds, breached their fiduciary duties
and violated the provisions of certain of the CNL Income Fund
partnership agreements in connection with the proposed acquisition
of the CNL Income Funds by APF. The plaintiffs are seeking
unspecified damages and equitable relief. The general partners and
APF believe that the lawsuit is without merit and intend to defend
vigorously against such claims. Because the lawsuit was so
recently filed, it is premature to further comment on the lawsuit
at this time.
Item 2. Changes in Securities. Inapplicable.
Item 3. Defaults upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
Item 5. Other Information. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Agreement and Plan of Merger by and between the
Registrant and CNL American Properties Fund,
Inc. ("APF") dated March 11, 1999 (filed as
Appendix B to the Prospectus Supplement for the
Registrant, constituting a part of the
Registration Statement of APF on Form S-4, File
No. 74329.)
3.1 Certificate of Limited Partnership of CNL Income
Fund II, Ltd. (Included as Exhibit 3.1 to
Amendment No. 1 to Registration Statement No.
33-10351 on Form S-11 and incorporated herein by
reference.)
3.2 Amended and Restated Agreement and Certificate
of Limited Partnership of CNL Income Fund II,
Ltd. (Included as Exhibit 3.2 to Form 10-K filed
with the Securities and Exchange Commission on
April 2, 1993, and incorporated herein by
reference.)
<PAGE>
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.)
(b) Reports on Form 8-K
Current Report on Form 8-K dated March 11, 1999 and filed
March 12, 1999, describing the proposed merger of the
Partnership with and into a subsidiary of CNL American
Properties Fund, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 14th day of May, 1999.
CNL INCOME FUND II, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
---------------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
--------------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund II, Ltd. at March 31, 1999, and its statement of income
for the three months then ended and is qualified in its entirety by reference to
the Form 10-Q of CNL Income Fund II, Ltd. for the three months ended March 31,
1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 1,577,312<F2>
<SECURITIES> 0
<RECEIVABLES> 130,417
<ALLOWANCES> 68,675
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 15,918,586
<DEPRECIATION> 3,651,736
<TOTAL-ASSETS> 18,440,817
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,688,875
<TOTAL-LIABILITY-AND-EQUITY> 18,440,817
<SALES> 0
<TOTAL-REVENUES> 433,872
<CGS> 0
<TOTAL-COSTS> 170,240
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 563,623
<INCOME-TAX> 0
<INCOME-CONTINUING> 563,623
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 563,623
<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.
<F2>Includes $678,175 in restricted cash.
</FN>
</TABLE>
