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 June 30, 1999
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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
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CNL Income Fund II, Ltd.
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Florida 59-2733859
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(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
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</TABLE>
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>
June 30, December 31,
1999 1998
------------------- -------------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,732,540 and
$3,631,359, respectively $ 12,186,046 $ 12,835,304
Investment in joint ventures 4,326,459 4,353,427
Mortgage note receivable -- 6,872
Cash and cash equivalents 842,128 889,891
Restricted cash 683,770 --
Receivables, less allowance for doubtful accounts
of $56,630 and $55,435, respectively 108,847 122,560
Prepaid expenses 8,628 4,801
Lease costs, less accumulated amortization of
$16,353 and $14,889, respectively 4,210 5,674
Accrued rental income 185,562 174,382
------------------- -------------------
$ 18,345,650 $ 18,392,911
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 73,729 $ 4,621
Escrowed real estate taxes payable 3,368 8,065
Distributions payable 515,629 515,629
Due to related parties 164,293 183,303
Rents paid in advance and deposits 24,161 40,412
------------------- -------------------
Total liabilities 781,180 752,030
Commitments and Contingencies (Note 4)
Partners' capital 17,564,470 17,640,881
------------------- -------------------
$ 18,345,650 $ 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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C>
Revenues:
Rental income from operating leases $ 437,442 $ 438,324 $ 857,643 $ 871,144
Interest and other income 22,201 19,785 35,872 42,739
----------- ----------- ----------- -----------
459,643 458,109 893,515 913,883
----------- ----------- ----------- -----------
Expenses:
General operating and administrative 24,557 34,944 60,381 64,870
Professional services 13,467 19,924 16,984 25,640
State and other taxes 185 167 15,711 14,732
Depreciation and amortization 81,536 83,312 164,585 166,624
Transaction costs 56,198 -- 88,522 --
----------- ----------- ----------- -----------
175,943 138,347 346,183 271,866
----------- ----------- ----------- -----------
Income Before Equity in Earnings of Joint Ventures,
Gain on Sale of Land and Building, and Real
Estate Disposition Fees 283,700 319,762 547,332 642,017
Equity in Earnings of Joint Ventures 107,524 105,499 214,763 214,915
Gain on Sale of Land and Building -- -- 192,752 --
Real Estate Disposition Fees -- -- -- (45,150 )
----------- ----------- ----------- -----------
Net Income $ 391,224 $ 425,261 $ 954,847 $ 811,782
=========== =========== =========== ===========
Allocation of Net Income:
General partners $ 3,911 $ 4,252 $ 8,239 $ 8,569
Limited partners 387,313 421,009 946,608 803,213
----------- ----------- ----------- -----------
$ 391,224 $ 425,261 $ 954,847 $ 811,782
=========== =========== =========== ===========
Net Income Per Limited Partner Unit $ 7.75 $ 8.42 $ 18.93 $ 16.06
=========== =========== =========== ===========
Weighted Average Number of Limited Partner
Units Outstanding 50,000 50,000 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>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
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<S> <C>
General partners:
Beginning balance $ 390,900 $ 373,111
Net income 8,239 17,789
------------------ -----------------
399,139 390,900
------------------ -----------------
Limited partners:
Beginning balance 17,249,981 18,828,538
Net income 946,608 1,715,950
Distributions ($20.63 and $65.89 per
limited partner unit, respectively) (1,031,258 ) (3,294,507 )
------------------ -----------------
17,165,331 17,249,981
------------------ -----------------
Total partners' capital $17,564,470 $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>
Six Months Ended
June 30,
1999 1998
--------------- ----------------
<S> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 976,678 $1,088,196
--------------- ----------------
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 ) 2,457,670
Collections on mortgage note receivable 6,817 --
--------------- ----------------
Net cash provided by investing activities 6,817 1,622,782
--------------- ----------------
Cash Flows from Financing Activities:
Distributions to limited partners (1,031,258 ) (2,341,628 )
--------------- ----------------
Net cash used in financing activities (1,031,258 ) (2,341,628 )
--------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents (47,763 ) 369,350
Cash and Cash Equivalents at Beginning of Period 889,891 470,194
--------------- ----------------
Cash and Cash Equivalents at End of Period $ 842,128 $ 839,544
=============== ================
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Deferred real estate disposition fees incurred
and unpaid at end of period $ -- $ 45,150
=============== ================
Distributions declared and unpaid at end of
period $ 515,629 $ 515,625
=============== ================
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and six months ended June 30, 1999 may not be indicative of
the results that may be expected for the year ending December 31, 1999.
Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund II, Ltd. (the "Partnership") for the year ended December
31, 1998.
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 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.
3. Restricted Cash:
As of June 30, 1999, the net sales proceeds of $677,678 from the sale
of the property in Columbia, Missouri, plus accrued interest of $6,092
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 and Six Months Ended June 30, 1999 and 1998
4. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to
which the Partnership would be merged with and into a subsidiary of APF
(the "Merger"). As consideration for the Merger, APF has agreed to
issue 1,196,634 shares of its common stock, par value $0.01 per share
(the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $20.00 per APF Share, the
price paid by APF investors (after an adjustment for a one for two
reverse stock split effective June 3, 1999) 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 the Partnership
continues unchanged) at $23,548,652 as of December 31, 1998. The APF
Shares are expected to be listed for trading on the New York Stock
Exchange concurrently with the consummation of the Merger, and
therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be
held in the fourth 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 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in
connection with the proposed Merger. On July 8, 1999, the plaintiffs
amended the complaint to add three additional limited partners as
plaintiffs. Additionally, on June 22, 1999, a limited partner in
certain of the CNL Income Funds served a lawsuit against the general
partners, APF and CNL Fund Advisors, Inc. and certain of its affiliates
in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend
vigorously against the claims. See Part II - Item 1. Legal Proceedings.
<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 June 30, 1999,
the Partnership owned 37 Properties, which included interests in three
Properties owned by joint ventures in which the Partnership is a co-venturer and
six Properties owned with affiliates of the general partners as
tenants-in-common.
Capital Resources
During the six months ended June 30, 1999 and 1998, the Partnership
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses) of $976,678 and $1,088,196, respectively. The decrease
in cash from operations for the six months ended June 30, 1999, as compared to
the six months ended June 30, 1998, is primarily a result of changes in the
Partnership's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In March 1999, the Partnership sold its Property in Columbia, Missouri
for $682,500 and received net sales proceeds of $677,678, resulting in a gain of
$192,752 for financial reporting purposes. This Property was originally acquired
by the Partnership in November 1987 and had a cost of approximately $511,200,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the Property for approximately $166,500 in excess of its
original purchase price. As of June 30, 1999, the net sales proceeds of
$677,678, plus accrued interest of $6,092, 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 and net
sales proceeds from the sale of a Property, pending reinvestment in an
additional Property, are invested in money market accounts or other short-term,
highly liquid investments such as demand deposit accounts at commercial banks,
certificates of deposit, and money market accounts with less than a 30-day
maturity date, pending the Partnership's use of such funds to pay Partnership
expenses or to make distributions to the partners. At June 30, 1999, the
Partnership had $842,128 invested in such short-term investments, as compared to
$889,891 at December 31, 1998. The funds remaining at June 30, 1999, after
payment of distributions and other liabilities, will be used to meet the
Partnership's working capital and other needs.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of operating expenses of the Partnership, to the extent that
the general partners determine that such funds are available for distribution.
Based on cash from operations, and for the six months ended June 30, 1998, a
portion of the proceeds received from the 1997 sales of two Properties in Avon
Park, Florida and Farmington Hills, Michigan, the Partnership declared
distributions to limited partners of $1,031,258 and $2,263,253 for the six
months ended June 30, 1999 and 1998, respectively ($515,629 and $515,625 for the
quarters ended June 30, 1999 and 1998, respectively). This represents
distributions of $20.63 and $45.27 for each of the six months ended June 30,
1999 and 1998, respectively ($10.31 for each of the quarters ended June 30, 1999
and 1998). Distributions for the six months ended June 30, 1998 included
$1,232,003 as a result of the distribution of the majority of the net sales
proceeds from the 1997 sales of the Properties in Avon Park, Florida and
Farmington Hills, Michigan. No distributions were made to the general partners
for the quarter and six months ended June 30, 1999 and 1998. No amounts
distributed to the limited partners for the six months ended June 30, 1999 and
1998 are required to be or have been treated by the Partnership as a return of
capital for purposes of calculating the limited partners' return on their
adjusted capital contributions. The Partnership intends to continue to make
distributions of cash available for distribution to the limited partners on a
quarterly basis.
Total liabilities of the Partnership, including distributions payable,
increased to $781,180 at June 30, 1999 from $752,030 at December 31, 1998. The
increase in liabilities at June 30, 1999 is primarily a result of the
Partnership accruing transaction costs relating to the proposed merger with CNL
American Properties Fund, Inc. ("APF"), as described below. The general partners
believe the Partnership has sufficient cash on hand to meet its current working
capital needs.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
<PAGE>
Results of Operations
During the six months ended June 30, 1999 and 1998, the Partnership
owned and leased 29 wholly owned Properties (which included one Property in
Columbia, Missouri which was sold in March 1999), to operators of fast-food and
family-style restaurant chains. In connection therewith, during the six months
ended June 30, 1999 and 1998, the Partnership earned $857,643 and $871,144,
respectively, in rental income from these Properties, $437,442 and $438,324 of
which was earned during the quarters ended June 30, 1999 and 1998, respectively.
Rental income decreased during the six months ended June 30, 1999, as compared
to the six months ended June 30, 1998, primarily as a result of the sale of the
Property in Columbia, Missouri, as described above in "Capital Resources."
For the six months ended June 30, 1999 and 1998, the Partnership also
owned and leased three Properties indirectly through joint venture arrangements
and six Properties as tenants-in-common with affiliates of the general partners.
In connection therewith, during the six months ended June 30, 1999 and 1998, the
Partnership earned $214,763 and $214,915, respectively, attributable to net
income earned by these joint ventures, $107,524 and $105,499 of which was earned
during the quarters ended June 30, 1999 and 1998, respectively.
Operating expenses, including depreciation and amortization, were
$346,183 and $271,866 for the six months ended June 30, 1999 and 1998,
respectively, of which $175,943 and $138,347 were incurred during the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
during the six months ended June 30, 1999, as compared to the six months ended
June 30, 1998, was primarily due to the Partnership incurring $88,522 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 "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 six months ended June 30, 1998, the Partnership recorded
deferred, subordinated real estate disposition fees of $45,150 payable to CNL
Fund Advisors, Inc. relating to the 1997 sales of the Properties in Avon Park,
Florida and Farmington Hills, Michigan. Initially, the Partnership considered
reinvesting the sales proceeds in additional Properties and therefore did not
include these amounts in the determination of the gain on sale for financial
reporting purposes during 1997. However, during the six months ended June 30,
1998, the Partnership declared a special distribution of net sales proceeds from
these Properties payable to the limited partners. Accordingly, the Partnership
recorded these subordinated real estate disposition fees during the six months
ended June 30, 1998. The payment of these fees is subordinated to the limited
partners receiving their cumulative 10 percent preferred return and their
adjusted capital contribution. No such fees were recorded during the six months
ended June 30, 1999.
As a result of the sale of the Property in Columbia, Missouri, as
described above in "Capital Resources," the Partnership recognized a gain of
$192,752 for financial reporting purposes during the six months ended June 30,
1999. No Properties were sold during the six months ended June 30, 1998.
Proposed Merger
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with APF, pursuant to which the Partnership would be merged with and
into a subsidiary of APF (the "Merger"). As consideration for the Merger, APF
has agreed to issue 1,196,634 shares of its common stock, par value $0.01 per
share (the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $20.00 per APF Share, the price paid
by APF investors (after an adjustment for a one for two reverse stock split
effective June 3, 1999) 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 the Partnership continues
unchanged) at $23,548,652 as of December 31, 1998. The APF Shares are expected
to be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners that
is expected to be held in the fourth 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 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in connection with
the proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to
add three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF and CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims. See Part II - Item 1. Legal Proceedings.
Year 2000 Readiness Disclosure
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. As of June 30, 1999 the
Partnership did not have any information or non-information technology systems.
The general partners and certain of the 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
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 certain of 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 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.
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 that 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 their 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 will 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 their 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, we 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 11, 1999, four limited partners in several CNL Income Funds
served a derivative and purported class action lawsuit filed April
22, 1999 against the general partners and APF in the Circuit Court
of the Ninth Judicial Circuit of Orange County, Florida, alleging
that the general partners breached their fiduciary duties and
violated provisions of certain of the CNL Income Fund partnership
agreements in connection with the proposed Merger. The plaintiffs
are seeking unspecified damages and equitable relief. On July 8,
1999, the plaintiffs filed an amended complaint which, in addition
to naming three additional plaintiffs, includes allegations of
aiding and abetting and conspiring to breach fiduciary duties,
negligence and breach of duty of good faith against certain of the
defendants and seeks additional equitable relief. As amended, the
caption of the case is Jon Hale, Mary J. Hewitt, Charles A.
Hewitt, Gretchen M. Hewitt Bernard J. Schulte, Edward M. and
Margaret Berol Trust, and Vicky Berol v. James M. Seneff, Jr.,
Robert A. Bourne, CNL Realty Corporation, and CNL American
Properties Fund, Inc., Case No. CIO-99-0003561.
On June 22, 1999, a limited partner of several CNL Income Funds
served a purported class action lawsuit filed April 29, 1999
against the general partners and APF, Ira Gaines, individually and
on behalf of a class of persons similarly situated, v. CNL
American Properties Fund, Inc., James M. Seneff, Jr., Robert A.
Bourne, CNL Realty Corporation, CNL Fund Advisors, Inc., CNL
Financial Corporation a/k/a CNL Financial Corp., CNL Financial
Services, Inc. and CNL Group, Inc., Case NO. CIO-99-3796, in the
Circuit Court of the Ninth Judicial Circuit of Orange County,
Florida, alleging that the general partners breached their
fiduciary duties and that APF aided and abetted their breach of
fiduciary duties in connection with the proposed Merger. The
plaintiff is seeking unspecified damages and equitable relief.
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.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Agreement and Plan of Merger by and between the
Registrant and CNL American Properties Fund, Inc.
("APF") dated March 11, 1999 and as amended on
June 4, 1999 (Filed as Appendix B to the
Prospectus Supplement for the Registrant,
constituting a part of Amendment No. 1 to 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.)
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.)
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended June 30, 1999.
<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 9th day of August, 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 June 30, 1999, and its statement of income
for the six months then ended and is qualified in its entirety by reference to
the Form 10-Q of CNL Income Fund II, Ltd. for the six months ended June 30,
1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,525,898<F2>
<SECURITIES> 0
<RECEIVABLES> 165,477
<ALLOWANCES> 56,630
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 15,918,586
<DEPRECIATION> 3,732,540
<TOTAL-ASSETS> 18,345,650
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,564,470
<TOTAL-LIABILITY-AND-EQUITY> 18,345,650
<SALES> 0
<TOTAL-REVENUES> 893,515
<CGS> 0
<TOTAL-COSTS> 346,183
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 954,847
<INCOME-TAX> 0
<INCOME-CONTINUING> 954,847
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 954,847
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund II, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
<F2>Includes 683,770 in restricted cash.
</FN>
</TABLE>
