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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 2
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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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
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)
450 South Orange Avenue
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 650-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Units of limited partnership interest ($500 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 50,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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The Form 10-K of CNL Income Fund II, Ltd. for the year ended December 31,
1998 is being amended to revise the disclosure under Item 1. Business.
PART I
Item 1. Business
CNL Income Fund II, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on November 13, 1986. The general partners of the Partnership are Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on January 2, 1987, the
Partnership offered for sale up to $25,000,000 in limited partnership interests
(the "Units") (50,000 Units at $500 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended. The
offering terminated on August 21, 1987, as of which date the maximum offering
proceeds of $25,000,000 had been received from investors who were admitted to
the Partnership as limited partners (the "Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of selected national and regional fast-food restaurant chains (the
"Restaurant Chains"). Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totalled
$22,300,178, and were used to acquire, either directly or indirectly through
joint venture arrangements, 39 Properties. During the year ended December 31,
1993, the Partnership sold its Property in Salisbury, North Carolina, and
reinvested the majority of the net sales proceeds in a Jack in the Box Property
in Lubbock, Texas. During the year ended December 31, 1994, the Partnership sold
two of its Properties in Graham, Texas, and Medina, Ohio, and reinvested the net
sales proceeds in two Checkers Properties, consisting of only land, located in
Fayetteville and Atlanta, Georgia, and a Kenny Rogers Roasters Property in
Arvada, Colorado, which is owned as tenants-in-common with an affiliate of the
General Partners. During the year ended December 31, 1997, the Partnership sold
its Properties in Eagan, Minnesota; Jacksonville, Florida; Farmington Hills (10-
mile Road), Michigan; Farmington Hills (12-mile Road), Michigan; Plant City,
Florida; Mathis, Texas and Avon Park, Florida and reinvested a portion of these
net sales proceeds in a Property in Mesa, Arizona, a Property in Smithfield,
North Carolina and a Property in Vancouver, Washington, all of which are owned
as tenants-in-common with affiliates of the General Partners. In addition,
during 1997, Show Low Joint Venture, in which the Partnership owns a 64 percent
interest, sold its Property in Show Low, Arizona to the tenant and reinvested
the net sales proceeds in a Property in Greensboro, North Carolina. During 1998,
the Partnership reinvested the net sales proceeds from the 1997 sales of the
Properties in Jacksonville, Florida and Mathis, Texas in a Property in Overland
Park, Kansas, and a Property in Memphis, Tennessee, as tenants-in-common with
affiliates of the General Partners. As a result of the above transactions, as of
December 31, 1998, the Partnership owned 38 Properties. The 38 Properties
included interests in three Properties owned by joint ventures in which the
Partnership is a co-venturer and six Properties owned with affiliates as
tenants-in-common. The lessee of the two Properties consisting of only land owns
the buildings currently on the land and has the right, if not in default under
the lease, to remove the buildings from the land at the end of the lease terms.
The Properties are leased on a triple-net basis with the lessees responsible for
all repairs and maintenance, property taxes, insurance and utilities.
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
APF is a real estate investment trust whose primary business is the ownership of
restaurant properties leased on a long-term, "triple-net" basis to operators of
national and regional restaurant chains. APF has agreed to issue shares of its
common stock, par value $0.01 per share (the "APF Shares"), as consideration for
the Merger. At a special meeting of the partners that is expected to be held in
the 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.
In the event that the Limited Partners vote against the Merger, the
Partnership will hold its Properties until the General Partners determine that
the sale or other disposition of the Properties is advantageous in view of the
Partnership's investment objectives. In deciding whether to sell Properties, the
General Partners will consider factors such as potential capital appreciation,
net cash flow and federal income tax considerations. Certain lessees have been
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granted options to purchase Properties, generally at the Property's then fair
market value after a specified portion of the lease term has elapsed. The
Partnership has no obligation to sell all or any portion of a Property at any
particular time, except as may be required under property or joint venture
purchase options granted to certain lessees.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership and
joint ventures in which the Partnership is a co-venturer provide for initial
lease terms, ranging from four to 20 years (the average being 16 years), and
expire between 2000 and 2018. The leases are on a triple-net basis, with the
lessee generally responsible for all repairs and maintenance, property taxes,
insurance and utilities. The leases of the Properties provide for minimum base
annual rental payments (payable in monthly installments) ranging from
approximately $8,300 to $222,800. Generally, the leases provide for percentage
rent, based on sales in excess of a specified amount, to be paid annually. In
addition, certain leases provide for increases in the annual base rent during
the lease term.
Generally, the leases of the Properties provide for two to four five-year
renewal options subject to the same terms and conditions as the initial lease.
Lessees of 20 of the Partnership's 38 Properties 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. Fair market value will be determined through an
appraisal by an independent appraisal firm. Additionally, certain leases provide
the lessee an option to purchase up to a 49 percent joint venture interest in
the Property, after a specified portion of the lease term has elapsed, at an
option purchase price similar to those described above multiplied by the
percentage interest in the Property with respect to which the option is being
exercised. A limited number of leases provide for a purchase option price which
is computed pursuant to a formula based on various measures of value contained
in an independent appraisal of the Property.
The leases also generally provide that, in the event the Partnership wishes
to sell the Property subject to a particular lease, the Partnership must first
offer the lessee the right to purchase the Property on the same terms and
conditions, and for the same price, as any offer which the Partnership has
received for the sale of the Property.
During the year ended December 31, 1998, the Partnership reinvested the net
sales proceeds from the 1997 sales of the Properties in Jacksonville, Florida
and Mathis, Texas in a Property in Overland Park, Kansas, and a Property in
Memphis, Tennessee, as tenants-in-common with affiliates of the General
Partners. The lease terms for these Properties are substantially the same as the
Partnership's other leases as described above in the first three paragraphs of
this section.
In addition, during 1998, the tenant of the Property in Oxford, Alabama
exercised its option to extend the lease for an additional five years beginning
in May 1998 with an increase in rental payments of 20 percent per year. All
other lease terms remained unchanged and are substantially the same as the
Partnership's other leases as described above.
Major Tenants
During 1998, two lessees of the Partnership, Golden Corral Corporation and
Restaurant Management Services, Inc., each contributed more than ten percent of
the Partnership's total rental income (including the Partnership's share of the
rental income from three Properties owned by joint ventures and six Properties
owned with affiliates as tenants-in-common). As of December 31, 1998, Golden
Corral Corporation was the lessee under leases relating to six restaurants and
Restaurant Management Services, Inc. was the lessee under leases relating to
four restaurants. It is anticipated that, based on the minimum rental payments
required by the leases, each of these lessees will continue to contribute more
than ten percent of the Partnership's total rental income in 1999. In addition,
two Restaurant Chains, Golden Corral Family Steakhouse Restaurants ("Golden
Corral") and Popeyes Famous Fried Chicken Restaurants ("Popeyes"), each
accounted for more than ten percent of the Partnership's total rental and
mortgage interest income in 1998 (including the Partnership's share of the
rental income from three Properties owned by joint ventures and six Properties
owned with affiliates as tenants-in-common). In 1999, it is anticipated that
these two Restaurant Chains each will continue to account for more than ten
percent of the total rental income to which the Partnership is entitled under
the terms of its leases. Any failure of these lessees or Restaurant Chains could
materially affect the Partnership's income if the Partnership is not able to re-
lease the Properties in a timely manner. As of December 31, 1998, no single
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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 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: one to hold a Property in Mesa, Arizona,
as tenants-in-common, with CNL Income Fund V, Ltd., an affiliate of the General
Partners; one 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 one to hold a Property in Vancouver, Washington, as tenants-in-common, with
CNL Income Fund, Ltd., CNL Income 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 an approximate 58 percent, 47 percent, and 37 percent interest,
in these Properties in Mesa, Arizona, Smithfield, North Carolina and Vancouver,
Washington, respectively.
In addition, in January 1998, the Partnership entered into two separate
agreements: to hold a 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
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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-tenant's percentage interest. The Partnership owns a
39.39% and a 13.38% interest in the Properties in Overland Park, Kansas and
Memphis, Tennessee, respectively.
Each of the affiliates is a limited partnership 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.
Certain Management Services
CNL Fund Advisors, Inc., an affiliate of the General Partners, provides
certain services relating to management of the Partnership and its Properties
pursuant to a management agreement with the Partnership. Under this agreement,
CNL Fund Advisors, Inc. is responsible for collecting rental payments,
inspecting the Properties and the tenants' books and records, assisting the
Partnership in responding to tenant inquiries and notices and providing
information to the Partnership about the status of the leases and the
Properties. CNL Fund Advisors, Inc. also assists the General Partners in
negotiating the leases. For these services, the Partnership has agreed to pay
CNL Fund Advisors, Inc. an annual fee of one-half of one percent of Partnership
assets (valued at cost) under management, not to exceed the lesser of one
percent of gross rental revenues or competitive fees for comparable services.
Under the property management agreement, the property management fee is
subordinated to receipt by the Limited Partners of an aggregate, ten percent,
noncumulative, noncompounded annual return on their adjusted capital
contributions (the "10% Preferred Return"), calculated in accordance with the
Partnership's limited partnership agreement (the "Partnership Agreement"). In
any year in which the Limited Partners have not received the 10% Preferred
Return, no property management fee will be paid.
The management agreement continues until the Partnership no longer owns an
interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
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.
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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 17th day of
December, 1999.
CNL INCOME FUND II, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
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ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
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ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
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JAMES M. SENEFF, JR.
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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.
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Signature Title Date
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<S> <C> <C>
/s/ Robert A. Bourne President, Treasurer and Director December 17, 1999
- ------------------------------ (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director December 17, 1999
- ------------------------------ (Principal Executive Officer)
James M. Seneff, Jr.
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