UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
(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, 1997
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) 422-1574
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 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
<PAGE>
The Form 10-K of CNL Income Fund II, Ltd. for the year ended December
31, 1997 is being amended to provide additional disclosure under Item 1.
Business, Item 2. Properties and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources, Short-Term
Liquidity and Long-Term Liquidity.
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. The remaining net sales proceeds were used to distribute to
limited partners amounts sufficient to pay state and federal income taxes, to
pay Partnership expenses and to meet other working capital needs of the
Partnership. 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. As a result
of the above transactions, as of December 31, 1997, the Partnership owned 36
Properties. The 36 Properties include interests in three Properties owned by
joint ventures in which the Partnership is a co-venturer and four 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. In January 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 Properties are leased on a triple-net basis with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities.
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. In general, the General Partners plan to seek the sale of the
remaining Properties commencing seven to 15 years after their acquisition. 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 1999 and 2016. 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 $8,100 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, 1997, the Partnership reinvested net
sales proceeds from the sales of its Properties in Eagan, Minnesota, Farmington
Hills (10-mile Road), Michigan and Plant City, Florida 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. 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 January 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.
Major Tenants
During 1997, 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 four
Properties owned with affiliates as tenants-in-common). As of December 31, 1997,
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, Golden Corral Corporation will continue
to contribute more than ten percent of the Partnership's total rental income in
1998 and subsequent years. In addition, four Restaurant Chains, Golden Corral
Family Steakhouse Restaurants ("Golden Corral"), KFC, Popeyes Famous Fried
Chicken Restaurants ("Popeyes") and Wendy's Old Fashioned Hamburger Restaurants
("Wendy's"), each accounted for more than ten percent of the Partnership's total
rental income in 1997 (including the Partnership's share of the rental income
from three Properties owned by joint ventures and four Properties owned with
affiliates as tenants-in-common). In subsequent years, it is anticipated that
these four 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. As of December 31, 1997, no single
tenant or group of affiliated tenants leased Properties with an aggregate
carrying value in excess of 20 percent of the total assets of the Partnership.
Joint Venture Arrangements and Tenancy in Common Arrangements
The Partnership has entered into a joint venture arrangement, Kirkman
Road Joint Venture, with an unaffiliated entity to purchase and hold one
Property. In addition, the Partnership has entered into two separate joint
venture arrangements: Holland Joint Venture with CNL Income Fund IV, Ltd., an
affiliate of the General Partners, to purchase and hold one Property; and Show
Low Joint Venture, with CNL Income Fund VI, Ltd., an affiliate of the General
Partners, to purchase and hold one Property. The affiliates are limited
partnerships organized pursuant to the laws of the state of Florida. 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 has a 50 percent interest in Kirkman Road Joint Venture, a 49
percent interest in Holland Joint Venture, and a 64 percent interest in Show Low
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 equally with an unaffiliated
entity for Kirkman Road Joint Venture 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 CNL Income Fund XIII, Ltd., a limited partnership
organized pursuant to the laws of the State of Florida, and 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, as
tenants-in-common, with CNL Income Fund V, Ltd., an affiliate of the General
Partners; to hold a Property in Smithfield, North Carolina, as
tenants-in-common, with CNL Income Fund VII, Ltd., an affiliate of the General
Partners; and to hold a Property in Vancouver, Washington, as tenants-in-common,
with CNL Income Fund, Ltd., CNL Income Fund V, Ltd. and CNL Income Fund VI,
Ltd., each of which is an affiliate 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- tenant's percentage interest.
The Partnership owns a 57.77%, 47% and 37.01% interest, in these Properties in
Mesa, Arizona; Smithfield, North Carolina and Vancouver, Washington,
respectively.
In addition, in January 1998, the Partnership entered into two separate
agreements to hold an IHOP Property in Overland Park, Kansas , as
tenants-in-common, with CNL Income Fund III, Ltd. and CNL Income Fund VI, Ltd.,
affiliates of the General Partners; and to hold a Property in Memphis,
Tennessee, as tenants-in-common, with CNL Income Fund VI, Ltd. and CNL Income
Fund XVI, Ltd., 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 a 39.42% and a 13.38%
interest in the Properties in Overland Park, Kansas and Memphis, Tennessee,
respectively.
The affiliates are limited partnerships organized pursuant to the laws
of the State of Florida. The tenancy in common agreement restricts each
co-tenant's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining co-tenant.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
Property Management
CNL Income Fund Advisors, Inc., an affiliate of the General Partners,
acted as manager of the Partnership's Properties pursuant to a property
management agreement with the Partnership through September 30, 1995. Under this
agreement, CNL Income Fund Advisors, Inc. was 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 Income Fund Advisors, Inc. also assisted the General Partners in
negotiating the leases. For these services, the Partnership had agreed to pay
CNL Income 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.
Effective October 1, 1995, CNL Income Fund Advisors, Inc. assigned its
rights in, and its obligations under, the property management agreement with the
Partnership to CNL Fund Advisors, Inc. All of the terms and conditions of the
property management agreement, including the payment of fees, as described
above, remain unchanged.
The property 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.
1
<PAGE>
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, 1997, the Partnership owned 36 Properties. Of the 36
Properties, 29 are owned by the Partnership in fee simple, three are owned
through joint venture arrangements and four are owned through tenancy in common
arrangements. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement. 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.
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with this report.
State Number of Properties
----- --------------------
Alabama 2
Arizona 1
Colorado 3
Florida 6
Georgia 2
Illinois 1
Indiana 1
Louisiana 1
Michigan 2
Minnesota 1
Missouri 1
North Carolina 2
New Mexico 2
Texas 8
Washington 1
Wyoming 2
------
TOTAL PROPERTIES: 36
======
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.
As of December 31, 1997, the Partnership had no plans for renovation of the
Properties. Depreciation expense is computed for buildings and improvements
using the straight line method using depreciable lives of 31.5 and 39 years for
federal income tax purposes. As of December 31, 1997, the aggregate cost basis
of the Properties owned by the Partnership and joint ventures (including
Properties owned through tenancy in common arrangements) for federal income tax
purposes was $16,420,257 and $4,806,629, respectively.
3
<PAGE>
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by Restaurant Chain.
Restaurant Chain Number of Properties
---------------- --------------------
Arby's 1
Boston Market 1
Burger King 1
Checkers 2
Chevy's Fresh Mex1
Darryl's 1
Denny's 3
Golden Corral 6
Jack in the Box 1
KFC 3
Lone Star Steakhouse 1
Pizza Hut 5
Ponderosa 1
Popeyes 4
Wendy's 2
Other 3
------
TOTAL PROPERTIES 36
======
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
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.
Leases. The Partnership leases the Properties to operators of selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance. 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. The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.
At December 31, 1997, 1996, 1995, 1994, and 1993, the Properties were
100%, 100%, 100%, 95%, and 97% occupied, respectively. The following is a
schedule of the average annual rent for each of the five years ended December
31:
<TABLE>
<CAPTION>
<S> <C>
For the Year Ended December 31:
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------
Rental Revenues (1) $2,277,558 $2,485,645 $2,472,523 $2,353,103 $2,394,438
Properties (2) 36 40 40 39 39
Average Rent per Unit $63,266 $62,141 $61,813 $60,336 $61,396
</TABLE>
(1) Rental revenues include the Partnership's share of rental revenues from the
three Properties owned through joint venture arrangements and the four
properties owned through tenancy in common arrangements. Rental revenues
have been adjusted, as applicable, for any amounts for which the Partnership
has established an allowance for doubtful accounts.
(2) Excludes Properties that were vacant at December 31 and which did not
generate any rental revenues during the year ended December 31.
The following is a schedule of lease expirations for leases in place as of
December 31, 1997 for each of the ten years beginning with 1998 and thereafter.
<TABLE>
<CAPTION>
<S> <C>
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
----------------------- ------------------ -------------------- ----------------
1998 1 36,000 1.71%
1999 1 84,000 3.98%
2000 2 65,069 3.08%
2001 - - -
2002 5 397,845 18.86%
2003 - - -
2004 - - -
2005 2 62,563 2.97%
2006 1 63,172 3.00%
2007 14 795,176 37.69%
Thereafter 10 605,703 28.71%
------- --------------- --------------
Totals 36 2,109,528 100.00%
</TABLE>
Leases with Major Tenants. The terms of the leases with each of the
Partnership's major tenants as of December 31, 1997 (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).
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.
At the time the Partnership elects to dispose of its Properties, other
than as a result of the exercise of tenant options to purchase Properties, the
Partnership will be in competition with other persons and entities to locate
purchasers for its Properties.
5
<PAGE>
PART II
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, 1997, the
Partnership owned 36 Properties, either directly or indirectly through joint
venture or tenancy in common arrangements.
Capital Resources
The Partnership's primary source of capital for the years ended December
31, 1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less cash
paid for expenses). Cash from operations was $2,157,912, $2,347,731 and
$2,168,367 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations during 1997, as compared to 1996, is
primarily a result of changes in the Partnership's working capital, and the
increase in cash from operations during 1996, as compared to 1995, is primarily
a result of changes in income and expenses as described in "Results of
Operations" below, and as 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, 1997, 1996 and 1995.
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 being 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 1997, the Partnership collected and recognized as income
approximately $18,100 relating to this promissory note. As of December 31, 1997
and 1996, the balances in the allowance for doubtful accounts relating to this
promissory note were $74,590 and $92,987, respectively, including accrued
interest of $2,654 and $3,493, respectively.
Other sources and uses of capital included the following during the years
ended December 31, 1997, 1996 and 1995.
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, in 1996, the Partnership entered
into various promissory notes with the corporate General Partner for loans
totalling $177,600 in connection with the operations of the Partnership. The
loans were uncollateralized, non-interest bearing and due on demand. As of
December 31, 1996, the Partnership had repaid the loans in full to the corporate
General Partner. In addition, in 1997, the Partnership entered into various
promissory notes with the corporate General Partner for loans totalling $721,000
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 its 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 a 57.77%
interest in the Property. The Partnership will distribute amounts sufficient to
enable the Limited Partners to pay federal and state income taxes, if any (at a
level reasonably assumed by the General Partners), resulting from the sale.
In 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, is
collateralized by personal property and is being collected in 18 monthly
installments of interest only and thereafter, the entire principal balance shall
become due. As of December 31, 1997, the mortgage note receivable was $42,734,
including accrued interest of $734.
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 rents)
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 General Partners believe that some of the sales
transactions, or portions thereof, relating to the sales of these six Properties
and the reinvestment of some of the net sales proceeds in additional Properties
will qualify as like-kind exchange transactions 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 these sales. The
Partnership intends to distribute the remaining net sales proceeds to the
Limited Partners. 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.
6
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None of the Properties owned by the Partnership, or the joint ventures or
the tenancy in common arrangements 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 and net sales
proceeds from the sale of Properties, pending reinvestment in additional
Properties, distributions to Limited Partners or use for the payment of
Partnership liabilities, are invested in money market accounts or other
short-term, highly liquid investments such as demand deposit accounts at
commercial banks, CDs and money market accounts with less than a 30-day maturity
date, pending the Partnership's use of such funds to pay Partnership expenses or
to make distributions to the partners. At December 31, 1997, the Partnership had
$470,194 invested in such short-term investments, as compared to $318,756 at
December 31, 1996. As of December 31, 1997, the average interest rate earned on
the rental income deposited in demand deposit accounts at commercial banks was
approximately four percent annually. The funds remaining at December 31, 1997,
will be used for the payment of distributions and other liabilities.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily of
the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash and
leasing them under triple-net leases to operators who generally meet specified
financial standards minimizes the Partnership's operating expenses. The General
Partners believe that the leases will continue to generate cash flow in excess
of operating expenses.
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 Partnership generally distributes cash from operations remaining
after the payment of the operating expenses of the Partnership, to the extent
that the General Partners determine that such funds are available for
distribution. Based primarily on current and anticipated future cash from
operations, and for the year ended December 31, 1997, the return of capital from
Show Low Joint Venture, and a portion of the proceeds received from the sale of
Properties, as described above, the Partnership declared distributions to the
Limited Partners of $2,376,000 for each of the years ended December 31, 1997,
1996 and 1995. This represents distributions of $47.52 per Unit for each of the
years ended December 31, 1997, 1996 and 1995. The distributions to the Limited
Partners for 1997, 1996, and 1995, were also based on loans received from the
General Partners of $721,000, $177,600, and $26,300, respectively, all of which
were subsequently repaid, as described above in "Capital Resources." The General
Partners expect to distribute some or all of the net sales proceeds form the
sale of one of the Properties in Farmington Hills, Michigan and from the
Property in Avon Park, Florida, to the Limited Partners. 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, is expected to reduce the Partnership's revenues.
The decrease in Partnership revenues, combined with the fact that a significant
portion of the Partnership's expenses are fixed in nature, is expected to result
in a decrease in cash distributions to the Limited Partners during 1998. No
amounts distributed or to be distributed to the Limited Partners for the years
ended December 31, 1997, 1996 and 1995, 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.
During 1997, 1996 and 1995, affiliates of the General Partners incurred
on behalf of the Partnership $68,555, $103,909 and $95,036, respectively, for
certain operating expenses. As of December 31, 1997 and 1996, the Partnership
owed $126,284 and $45,078, respectively, to affiliates for such amounts and
accounting and administrative services. Amounts payable to other parties,
including distributions payable, decreased to $605,826 at December 31, 1997,
from $642,163 at December 31, 1996. Liabilities at December 31, 1997, to the
extent they exceed cash and cash equivalents at December 31, 1997, will be paid
from future cash from operations, from proceeds from sales of Properties as
described above, from collections of amounts received in accordance with the
agreement relating to past due rents described above, and, in the event the
General Partners elect to make additional contributions or loans to the
Partnership, from future General Partner contributions or loans.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During 1995, 1996 and 1997, the Partnership owned and leased 36 wholly
owned Properties (including seven Properties, one in each of Eagan, Minnesota,
which was sold in June 1997, Jacksonville, Florida, which was sold in September
1997, Plant City, Florida, which was sold in October 1997, Mathis, Texas and
Avon Park, Florida which were sold in December 1997 and two Properties in
Farmington Hills, Michigan, which were sold in October 1997). In addition,
during 1995, 1996 and 1997, the Partnership was a co-venturer in three separate
joint ventures that each owned and leased one Property, and during 1995 and
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. As of December 31, 1997, the Partnership
owned, either directly, as tenants-in-common with affiliates, or through joint
venture arrangements, 36 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
$8,100 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, 1997, 1996 and 1995, the Partnership
earned $2,024,119, $2,224,500 and $2,207,971, respectively, in rental income
from the Partnership's wholly owned Properties described above. Rental income
for 1997, as compared to 1996, decreased approximately $218,900 primarily as the
result of the sales during 1997 of the two Properties in Farmington Hills,
Michigan and the Properties in Plant City, Florida; Mathis, Texas; Jacksonville,
Florida; Eagan, Michigan and Avon Park, Florida. The decrease in rental income
was partially offset by an increase of approximately $12,200 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 "Capital Resources." Rental
income earned from wholly owned Properties is expected to decrease during 1998
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
"Capital Resources."
During the years ended December 31, 1997, 1996 and 1995, the Partnership
also earned $68,920, $79,313 and $70,159, respectively, in contingent rental
income. The decrease in contingent rental income for 1997, as compared to 1996,
is primarily due to the sales of several Properties, the leases of which
required the payment of contingent rental income. Contingent rental income for
the year ended December 31, 1996, as compared to 1995, increased primarily as a
result of an increase in gross sales of certain restaurant Properties that are
subject to leases requiring the payment of contingent rental income.
For the years ended December 31, 1997, 1996 and 1995 , the Partnership
also earned $389,915, $130,996 and $153,677, 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 is primarily attributable to the
fact that Show Low Joint Venture, in which the Partnership owns a 64 percent
interest, recognized a gain of approximately $360,000 for financial reporting
purposes as a result of the sale of its Property in January 1997, as described
above in "Capital Resources." Show Low Joint Venture reinvested the majority of
the net sales proceeds in an additional Property in June 1997. In addition, the
increase in net income earned by joint ventures during 1997, as compared to
1996, is attributable to the fact that during 1997, the Partnership acquired an
interest in a Property in Mesa, Arizona, a Property in Smithfield, North
Carolina and a Property in Vancouver, Washington, all of which are owned with
affiliates as tenants-in-common, as described above in "Capital Resources." The
increase in net income earned by joint ventures during 1997, as compared to
1996, and the decrease in net income earned by joint ventures during 1996, as
compared to 1995, is primarily a result of a the fact that during 1996, the
former tenant of the Property in Arvada, Colorado,owned with an affiliate as
tenants-in-common, defaulted under the terms of its lease. The Partnership and
the affiliate, as tenants-in-common, entered into a new lease for this Property
with a new tenant during 1996.
During at least one of the years ended December 31, 1997, 1996 and 1995,
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 four Properties owned
with affiliates as tenants-in-common). As of December 31, 1997, 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, Golden Corral Corporation will continue to
contribute more than ten percent of the Partnership's total rental income during
1998 and subsequent years. In addition, during at least one of the three years
ending December 31, 1997, 1996 and 1995, five Restaurant Chains, Golden Corral,
Popeyes, KFC, Denny's and Wendy's, each accounted for 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 four Properties
owned with affiliates as tenants-in-common). In subsequent years, it is
anticipated that Golden Corral, Popeyes, KFC and Wendy's 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.
Operating expenses, including depreciation and amortization expense, were
$598,098, $588,923 and $617,237 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating expenses during 1997, as compared
to 1996, is partially due to the fact that 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 "Capital Resources." The increase in
operating expenses during 1997, as compared to 1996, was also attributable to,
and the decrease in operating expenses during 1996, as compared to 1995, was
partially offset by, 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 "Capital
Resources." The decrease in operating expenses during 1996, as compared to 1995,
was primarily a result of the fact that during 1995, the Partnership expensed
the balance of unamortized lease costs totalling approximately $35,600, relating
to the original lease for the Property in Gainesville, Texas, following the
termination of such lease during the year ended December 31, 1995.
As a result of the sales of the two Properties in Farmington Hills,
Michigan and the Properties in Eagan, Minnesota; Jacksonville, Florida; Plant
City, Florida; Mathis, Texas and Avon Park, Florida, as described above in
"Capital Resources," 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, 1996 and 1995.
The General Partners of the Partnership are in the process of assessing
and addressing the impact of the year 2000 on their computer package software.
The hardware and built-in software are believed to be year 2000 compliant.
Accordingly, the General Partners do not expect this matter to materially impact
how the Partnership conducts business nor its current or future results of
operations or financial position.
The Partnership's leases as of December 31, 1997, 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.
7
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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 29th day of
July, 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.
Signature Title Date
--------- ----- ----
/s/ Robert A. Bourne President, Treasurer and July 29, 1999
- -------------------- Director (Principal Financial
Robert A. Bourne and Accounting Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer July 29, 1999
- ------------------------ and Director (Principal
James M. Seneff, Jr. Executive Officer)
<PAGE>
