<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number 0-16824
CNL INCOME FUND II, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2733859
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 540-2000
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Units of limited partnership interest ($500 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No ____
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 50,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
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. During 1999, the Partnership sold its
Properties in Columbia, Missouri and Littleton, Colorado and reinvested the
majority of the net sales proceeds in a joint venture arrangement, Peoria Joint
Venture, with CNL Income Fund X, Ltd., a Florida Limited partnership and
affiliates of the General Partners. As a result of the above transactions, as of
December 31, 1999, the Partnership owned 37 Properties. The 37 Properties
include interests in four 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 Properties consisting of only land owns the
buildings currently on the land, and the lessee 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 generally 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 also have been granted options to purchase Properties, generally at the
Property's then fair market value after a specified portion of the lease term
has elapsed. The Partnership has no obligation to sell all or any portion of a
Property at any particular time, except as may be required under property
purchase options granted to certain lessees.
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 "Termination
of 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. Under the
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Agreement and Plan of Merger, APF was to issue shares of its common stock as
consideration for the Merger. On March 1, 2000, the General Partners and APF
announced that they had mutually agreed to terminate the Agreement and Plan of
Merger. the agreement to terminate the Agreement and Plan of Merger was based,
in large part, on the General Partners' concern that, in light of market
conditions relating to publicly traded real estate investment trusts, the value
of the transaction had diminished. As a result of such diminishment, the General
partners; ability to unequivocally recommend voting for the transaction, in the
exercise of their fiduciary duties, had become questionable.
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 five to 20 years (the average being 17 years), and
expire between 2000 and 2019. The leases are, in general, on a triple-net basis,
with the lessee 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 $8,600 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 27 of the Partnership's 37 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, 1999, the Partnership reinvested the
net sales proceeds from the sales of the Properties in Columbia, Missouri and
Littleton, Colorado in a joint venture arrangement, Peoria Joint Venture with
CNL Income Fund X, Ltd., a Florida limited partnership and affiliate of the
General Partners. The lease terms for this Property are substantially the same
as the Partnership's other leases as described above.
In addition, during 1999, the tenant of the Property in Sterling
Heights, Michigan exercised its option to extend the lease for an additional
five years beginning in October 1999 with an increase in rental payments of 15
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 1999, 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 and mortgage interest income from four Properties owned by joint
ventures and six Properties owned with affiliates of the General Partners as
tenants-in-common). As of December 31, 1999, Golden Corral Corporation was the
lessee under leases relating to five restaurants and Restaurant Management
Services, Inc. was the lessee under leases relating to four restaurants. It is
anticipated that, based on the minimum 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 2000. 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 1999
(including the Partnership's share of the rental income from four Properties
owned by joint ventures and six Properties owned with affiliates of the General
Partners as tenants-in-common). In 2000, it is anticipated that these two
Restaurant Chains each will continue to account for more than ten percent of the
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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, 1999, 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 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 three separate joint
venture arrangements: Holland Joint Venture with CNL Income Fund IV, Ltd., Show
Low Joint Venture with CNL Income Fund VI, Ltd. and Peoria Joint Venture with
CNL Income Fund X, Ltd. Each joint venture was formed to purchase and hold one
Property. In addition each of the CNL Income Fund joint venture partners is an
affiliate of the General Partners, and is a limited partnership 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, a 64 percent interest in Show Low Joint Venture, and a 48 percent
interest in Peoria 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, Show Low Joint
Venture, and Peoria 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 Show Low Joint Venture, and Peoria Joint Venture is distributed 50
percent, 49 percent, 64 percent, and 48 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 tenancy-in-common agreements: one to hold a Property
in Mesa, Arizona, with CNL Income Fund V, Ltd., one to hold a Property in
Smithfield, North Carolina, with CNL Income Fund VII, Ltd., and one to hold a
Property in Vancouver, Washington, with CNL Income Fund, Ltd., CNL Income V,
Ltd. and CNL Income Fund VI, Ltd., In addition, in January 1998, the Partnership
entered into two additional tenancy-in-common agreements: one to hold a Property
in Overland Park, Kansas, with CNL Income Fund III, Ltd. and CNL Income Fund VI,
Ltd., and to hold a Property in Memphis, Tennessee, with CNL Income Fund VI,
Ltd. and CNL Income Fund XVI, Ltd.. The agreements provide for the Partnership
and the other parties to share in the profits and losses of the Properties in
proportion to their percentage interest. The Partnership owns an approximate 58
percent, 47 percent, 37 percent, 39.39 percent, and 13.38 percent
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interest, in these Properties in Mesa, Arizona; Smithfield, North Carolina;
Vancouver, Washington; and Overland Park, Kansas; and Memphis Tennessee
respectively.
Each of the CNL Income Fund co-venture partners is an affiliate of the
General Partners, and is a limited partnership organized pursuant to the laws of
the State of Florida. The tenancy in common agreement restricts each parties
ability to sell, transfer, or assign its interest in the tenancy in common's
Property without first offering it for sale to the remaining party.
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 American Properties Fund, Inc.
("APF"), the parent company of CNL Fund Advisor, 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 Financial
Group, Inc. (formerly 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, 1999, the Partnership owned 37 Properties. Of the 37
Properties, 27 are owned by the Partnership in fee simple, four are owned
through joint venture arrangements and six 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. More detailed information regarding the
location of the Properties is contained in the Schedule of Real Estate and
Accumulated Depreciation for the year ended December 31, 1999.
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.
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The following table lists the Properties owned by the Partnership as of
December 31, 1999 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation for the year ended December 31, 1999.
State Number of
----- ---------
Properties
----------
Alabama 2
Arizona 2
Colorado 2
Florida 6
Georgia 2
Illinois 1
Indiana 1
Kansas 1
Louisiana 1
Michigan 2
Minnesota 1
New Mexico 2
North Carolina 2
Tennessee 1
Texas 8
Washington 1
Wyoming 2
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TOTAL PROPERTIES: 37
==============
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, 1999, 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, 1999, the aggregate cost of the
Properties owned by the Partnership and joint ventures (including Properties
owned through tenancy in common arrangements) for federal income tax purposes
was $9,354,535 and $8,335,346, respectively.
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The following table lists the Properties owned by the Partnership as of
December 31, 1999 by Restaurant Chain.
Restaurant Chain Number of Properties
---------------- --------------------
Arby's 1
Boston Market 1
Burger King 1
Checkers 2
Chevy's Fresh Mex 1
Darryl's 1
Denny's 3
Golden Corral 5
IHOP 3
Jack in the Box 1
KFC 3
Pizza Hut 5
Ponderosa 1
Popeyes 4
Wendy's 2
Other 3
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TOTAL PROPERTIES 37
==============
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.
As of December 31, 1999, 1998, 1997, 1996, and 1995, the Properties
were fully occupied. The following is a schedule of the average rent per
Property for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------ ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Rental Revenues (1) $ 2,255,787 $ 2,337,182 $2,277,558 $2,485,645 $2,472,523
Properties 37 38 36 40 40
Average Rent per property $ 60,967 $ 61,505 $ 63,266 $ 62,141 $ 61,813
</TABLE>
(1) Rental income includes the Partnership's share of rental income from
the Properties owned through joint venture arrangements and the
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.
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The following is a schedule of lease expirations for leases in place as
of December 31, 1999, for each of the next ten years and thereafter.
<TABLE>
<CAPTION>
Percentage of
Expiration Number Annual Rental Gross Annual
Year of Leases Revenues Rental Income
-------------- --------------- ------------------ ---------------------
<S> <C> <C> <C>
2000 1 $ 50,899 2.20%
2001 -- -- --
2002 4 341,613 14.80%
2003 1 43,200 1.87%
2004 1 86,100 3.73%
2005 2 64,996 2.81%
2006 1 150,000 6.50%
2007 13 707,821 30.65%
2008 1 62,740 2.72%
2009 1 63,172 2.74%
Thereafter 12 738,368 31.98%
--------- ------------ ------------
Totals 37 $ 2,308,909 100.00%
========= ============ ============
</TABLE>
Leases with Major Tenants. The terms of the leases with each of the
Partnership's major tenants as of December 31, 1998 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business -Leases .
Golden Corral Corporation leases five 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 $98,900 (ranging from
approximately $77,400 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.
Item 3. 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
------------------------------------------------------------
7
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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.
On September 23, 1999, Judge Lawrence Kirkwood entered an order
consolidating the two cases under the caption In re: CNL Income Funds
-----------------------
Litigation, Case No. 99-3561. Pursuant to this order, the plaintiffs in these
- ----------------------------
cases filed a consolidated and amended complaint on November 8, 1999. On
December 22, 1999, the General Partners and CNL Group, inc. filed motions to
dismiss and motions to strike. On December 28, 1999, APF and CNL Fund Advisors,
Inc. filed motions to dismiss. On March 6, 2000, all of the defendants filed a
Joint Notice of Filing Form 8-K Reports and Suggestion of Mootness.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of March 15, 2000, there were 2,207 holders of record of the Units.
There is no public trading market for the Units and it is not anticipated that a
public market for the Units will develop. During 1999, Limited Partners who
wished to sell their Units may have offered the Units for sale pursuant to the
Partnership's distribution reinvestment plan (the "Plan"), and Limited Partners
who wished to have their distributions used to acquire additional Units (to the
extent Units were available for purchase), may have done so pursuant to such
Plan. The General Partners had the right to prohibit transfers of Units. From
inception through December 31, 1999, the price paid for any Unit transferred
pursuant to the Plan ranged from $436.20 to $475 per Unit. The price paid for
any Unit transferred other than pursuant to the Plan was subject to negotiation
by the purchaser and the selling Limited Partner. The Partnership will not
redeem or repurchase Units.
The following table reflects, for each calendar quarter, the high, low
and average sales prices for transfers of Units during 1999 and 1998 other than
pursuant to the Plan, net of commissions.
<TABLE>
<CAPTION> 1999 1998
---------------------------------- ----------------------------------
High Low Average High Low Average
-------- ------- --------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $355 $355 $355 $456 $431 $444
Second Quarter 473 473 473 395 395 395
Third Quarter (2) (2) (2) 475 361 444
Fourth Quarter 380 337 365 430 420 423
</TABLE>
(1) A total of 343 and 207 Units were transferred other than pursuant to
the Plan for the years ended December 31, 1999 and 1998, respectively.
(2) No transfer of Units took place during the quarter other than pursuant
to the Plan.
The capital contribution per Unit was $500. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
For the years ended December 31, 1999 and 1998, the Partnership
declared cash distributions of $2,062,516 and $3,294,507, respectively, to the
Limited Partners. During 1998, distributions included a special distribution of
8
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$1,232,003 as a result of the distribution of net sales proceeds from the 1997
sales of the Properties in Avon Park, Florida and Farmington Hills, Michigan.
This amount was applied toward the Limited Partners' cumulative 10% Preferred
Return. In deciding whether to sell Properties, the General Partners will
consider factors such as potential capital appreciation, net cash flow, and
federal income tax considerations. The reduced number of Properties for which
the Partnership receives rental payments, as well as ongoing operations, reduced
the Partnership's revenues. The decrease in Partnership revenues, combined with
the fact that a significant portion of the Partnership's expenses are fixed in
nature, resulted in a decrease in cash distributions to the Limited Partners
commencing in 1998. No amounts distributed to the Limited Partners for the years
ended December 31, 1999 and 1998, are required to be or have been treated by the
Partnership as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions. No distributions have
been made to the General Partners to date. As indicated in the chart below, the
distributions were declared at the close of each of the Partnership's calendar
quarters. These amounts include monthly distributions made in arrears for the
Limited Partners electing to receive such distributions on this basis.
Quarter Ended 1999 1998
--------------------- ------------ ------------
March 31 $ 515,629 $ 1,747,628
June 30 515,629 515,625
September 30 515,629 515,625
December 31 515,629 515,629
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although the General Partners, in their sole discretion, may elect to pay
distributions monthly.
(b) Not applicable
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31:
Revenues (1) $ 2,244,389 $ 2,337,414 $ 2,547,854 $ 2,455,884 $ 2,455,754
Net income (2) 1,699,378 1,733,739 3,639,880 1,866,961 1,838,517
Cash distributions
declared (3) 2,062,516 3,294,507 2,376,000 2,376,000 2,376,000
Net income per Unit (2) 33.69 34.32 72.18 36.97 36.40
Cash distributions
declared per Unit 41.25 65.89 47.52 47.52 47.52
At December 31:
Total assets $18,026,218 $18,392,911 $19,959,059 $18,617,318 $19,110,615
Partners' capital 17,277,743 17,640,881 19,201,649 17,937,769 18,446,808
</TABLE>
(1) Revenues include equity in earnings of joint ventures.
(2) Net income for the year ended December 31, 1998 has been reduced by
real estate disposition fees of $45,150 as a result of the 1997 sales
of two Properties. Net income for the years ended December 31, 1999 and
1997, includes $192,752 and $1,476,124, respectively, from gain on sale
of land and buildings. In addition, net income for the year ended
December 31, 1999, includes $79,585 from a loss on sale of land and
building. Net income for the year ended December 31, 1997, also
includes lease termination income of $214,000, recognized by the
Partnership in connection with consideration the Partnership received
for releasing the former tenants from their obligations under the terms
of the leases of three of the Properties sold.
(3) Distributions for the year ended December 31, 1998 include a special
distribution to the Limited Partners of $1,232,003 as a result of the
distribution of the net sales proceeds from the 1997 sales of two
Properties.
9
<PAGE>
The above selected financial data should be read in conjunction with
the financial statements and related notes contained in Item 8 hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Partnership was organized on November 13, 1986, to acquire for
cash, either directly or through joint venture arrangements, both newly
constructed and existing restaurant Properties, as well as land upon which
restaurant Properties were to be constructed, which are leased primarily to
operators of selected national and regional fast-food Restaurant Chains. The
leases are, in general, triple-net leases, with the lessees responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of December
31, 1999, the Partnership owned 37 Properties, either directly or indirectly
through joint venture or tenancy in common arrangements.
Capital Resources
During the years ended December 31, 1999, 1998, and 1997, the
Partnership generated cash from operations (which includes cash received from
tenants, distributions from joint ventures and interest received, less cash paid
for expenses) of $2,004,997, $2,135,691, and $2,157,912, respectively. The
decrease in cash from operations during 1999, as compared to 1998, was primarily
a result of changes in income and expenses as described in "Results of
Operations" below. The decrease in cash from operations during 1998, as compared
to 1997, was primarily a result of changes in income and expenses as described
in "Results of Operations" below, and a result of changes in the Partnership's
working capital. Cash from operations was also affected by the following
transactions during the years ended December 31, 1999, 1998, and 1997.
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 prorata 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 was in the form of a promissory note, resulting in a gain of $158,251
for financial reporting purposes. This Property was originally acquired by the
Partnership in August 1987 and had a cost of approximately $601,100, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the Property for approximately $64,800 in excess of its
original purchase price. In October 1997, the Partnership reinvested the net
cash sales proceeds of approximately $623,900 in a Property in Mesa, Arizona, as
tenants-in-common with an affiliate of the General Partners. In connection
therewith, the Partnership and the affiliate entered into an agreement whereby
each co-venturer will share in the profits and losses of the Property in
proportion to each co-venturer's interest. The Partnership owns an approximate
58 percent interest in the Property. The Partnership distributed amounts
sufficient to enable the Limited Partners to pay federal and state income taxes
(at a level reasonably assumed by the General Partners) resulting from the sale.
In connection with the sale during 1997 of its Property in Eagan,
Minnesota, the Partnership accepted a promissory note in the principal sum of
$42,000. The promissory note bore interest at a rate of 10.50% per annum and is
collateralized by personal property. Initially, the note was to be collected in
18 monthly installments of interest only and, was thereafter, the entire
principal balance became due. During 1998, the note was amended to require six
monthly installments of $7,368, including interest, commencing on July 1, 1998.
As of December 31, 1998, the
10
<PAGE>
mortgage note receivable balance was $6,872 including accrued interest of $56.
In January 1999, the balance, including accrued interest, was collected.
In addition, during 1997, the Partnership sold its Properties in
Jacksonville, Plant City and Avon Park, Florida, and Mathis, Texas, and its two
Properties in Farmington Hills, Michigan, to third parties for aggregate sales
prices of $4,162,006 and received aggregate net sales proceeds of $4,035,196,
resulting in aggregate gains of $1,317,873 for financial reporting purposes.
These six Properties were originally acquired by the Partnership during 1987 and
had aggregate costs of approximately $3,338,800, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold these six
Properties for approximately $714,400, in the aggregate, in excess of their
original aggregate purchase prices. During 1997, the Partnership reinvested
approximately $1,512,400 of these net sales proceeds in a Property in Vancouver,
Washington, and a Property in Smithfield, North Carolina, as tenants-in-common
with affiliates of the General Partners. As of December 31, 1997, remaining net
sales proceeds from five of the six Properties of $2,470,175, including accrued
interest of $12,505, were being held in interest bearing escrow accounts. In
January 1998, the Partnership reinvested a portion of the net sales proceeds in
a Property in Overland Park, Kansas, and a Property in Memphis, Tennessee, as
tenants-in-common with affiliates of the General Partners. The Partnership
distributed amounts sufficient to enable the Limited Partners to pay federal and
state income taxes (at a level reasonably assumed by the General Partners)
resulting from these sales. During 1998, the Partnership distributed the
remaining net sales proceeds to the Limited Partners in a special distribution,
as described below in "Short-Term Liquidity." 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.
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. In addition in November 1999, the Partnership sold its
Property in Littleton, Colorado, and received net sales proceeds of $150,000,
resulting in a loss of $79,585 for financial reporting purposes. The Partnership
distributed amounts sufficient to enable the Limited Partners to pay federal and
state income taxes, (at a level reasonably assumed by the General Partners),
resulting from the sales.
In November 1999, the Partnership reinvested the net sales proceeds
from the sale of this Property in a joint venture arrangement, Peoria Joint
Venture. Peoria Joint Venture, was formed to purchase and hold one Property. The
Partnership's co-venture partner is with CNL Income Fund X, Ltd., a Florida
limited partnership and an affiliate of the General Partners. The Partnership
contributed approximately $762,200 and had a 48 percent interest in the profits
and losses of the joint venture as of December 31, 1999.
None of the Properties owned by the Partnership, or the joint ventures
or 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, 1999, the Partnership had
$904,715 invested in such short-term investments, as compared to $889,891 at
December 31, 1998. As of December 31, 1999, the average interest rate earned on
the rental income deposited in demand deposit accounts at commercial banks was
approximately 5.00 percent annually. The funds remaining at December 31, 1999,
11
<PAGE>
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.
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
generally on a triple-net basis, it is not anticipated that a permanent reserve
for maintenance and repairs will be established at this time. To the extent,
however, that the Partnership has insufficient funds for such purposes, the
General Partners will contribute to the Partnership an aggregate amount of up to
one percent of the offering proceeds for maintenance and repairs.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
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 $2,062,516, $3,294,507, and $2,376,000 for years ended
December 31, 1999,1998 and1997, respectively. This represents distributions of
$41.25, $65.89, and $47.52 per Unit for the years commencing in December 31,
1999, 1998 and 1997, respectively. The distributions to the Limited Partners for
1997 were also based on a loan received from the General Partners of $721,000,
which was subsequently repaid. Distributions for the year ended December 31,
1998 included $1,232,003 as a result of the distribution of the majority of the
net sales proceeds from the 1997 sales of the Properties in Avon Park, Florida
and Farmington Hills, Michigan. This special distribution was effectively a
return of a portion of the Limited Partners' investment; although, in accordance
with the Partnership agreement, it was applied to the Limited Partners' unpaid
preferred return. As a result of the sales of the Properties, the Partnership's
total revenue was reduced during 1998 and is expected to remain at reduced
amounts in subsequent years, while the majority of the Partnership's operating
expenses remained fixed. Therefore, distributions of net cash flow were adjusted
commencing in 1998. No amounts distributed to the Limited Partners for the years
ended December 31, 1999, 1998, and 1997, 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 1999, 1998, and 1997, affiliates of the General Partners
incurred on behalf of the Partnership $138,190, $116,317, and $68,555,
respectively, for certain operating expenses. In addition, during the year ended
December 31, 1998, the Partnership incurred $45,150 in real estate disposition
fees due to an affiliate as a result of its services in connection with the 1997
sales of the Properties in Avon Park, Florida and Farmington Hills, Michigan. As
of December 31, 1999 and 1998, the Partnership owed $105,654 and $183,303,
respectively, to affiliates for such amounts and accounting and administrative
services. The payment of the real estate disposition fees is deferred until the
Limited Partners have received their cumulative 10% Preferred Return and their
adjusted capital contributions. Other liabilities, including distributions
payable, increased to $642,821 at December 31, 1999, from $568,727 at December
31, 1998, primarily as a result of the Partnership accruing transaction costs
relating to the proposed merger with APF, as described in "Termination of
Merger". The General Partners believe that the Partnership has sufficient cash
on hand to meet its current working capital needs.
12
<PAGE>
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During 1997, the Partnership owned and leased 36 wholly owned
Properties (including seven Properties sold during 1997). During 1998 and 1999,
the Partnership owned and leased 27 wholly owned Properties. In addition, during
1998 and 1997, the Partnership was a co-venturer in three separate joint
ventures that each owned and leased one Property, and during 1999, the
Partnership was a co-venturer in four separate joint ventures that each owned
and leased one Property. During 1997, the Partnership owned and leased four
Properties with affiliates as tenants-in-common, and during 1999 and 1998, the
Partnership owned and leased six Properties with affiliates, as
tenants-in-common. As of December 31, 1999, the Partnership owned, either
directly, as tenants-in-common with affiliates of the General Partners, or
through joint venture arrangements, 37 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 $8,600 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, 1999, 1998, and 1997, the
Partnership earned $1,695,181, $1,773,925, and $2,024,119, respectively, in
rental income from the Partnership's wholly owned Properties described above.
Rental income decreased during 1999, as compared to 1998, partially as a result
of the sales of the Properties in Columbia, Missouri and Littleton, Colorado, as
described above in "Capital Resources". In addition, rental and earned income
decreased during 1999, partially as a result of the Partnership establishing an
allowance for doubtful accounts of approximately $18,500 for past due rental
amounts relating to the Properties in Casper and Rock Springs, Wyoming in
accordance with the Partnership's collection policy. The General Partners will
continue to pursue collection of past due rental amounts relating to these
Properties and will recognize such amounts as income if collected.
The decrease in rental income during 1998, as compared to 1997, was
primarily attributable to a decrease in rental income as a result of the sales
of seven Properties during 1997. The Partnership reinvested the majority of the
net sales proceeds in Properties held as tenants-in-common with affiliates of
the General Partners resulting in an increase in equity in earnings of joint
ventures, as described below. Rental income earned from wholly owned Properties
is expected to remain at reduced amounts as a result of the Partnership
reinvesting the net sales proceeds in Properties held as tenants-in-common with
affiliates of the General Partners, and distributing net sales proceeds to the
Limited Partners, as described above in "Short-Term Liquidity".
During the years ended December 31, 1999, 1998, and 1997, the
Partnership also earned $40,045, $51,029, and $68,920, respectively, in
contingent rental income. Contingent rental income was lower in 1999, as
compared to 1998, as a result of the fact that the Partnership adjusted
estimated contingent rental amounts accrued at December 31, 1998, to was actual
amounts received during 1999. The decrease in contingent rental income during
1998, as compared to 1997, was primarily due to the 1997 sales of several
Properties, the leases of which required the payment of contingent rental
income.
During the years ended December 31, 1999, 1998, and 1997, the
Partnership also earned $440,215, $431,974, and $389,915, respectively,
attributable to net income earned by joint ventures in which the Partnership is
a co-venturer. Net income earned by joint ventures increased during 1999, as
compared to 1998, as a result of the fact that in November 1999, the Partnership
reinvested the net sales proceeds from the sales of the Properties in Columbia,
Missouri and Littleton, Colorado, in Peoria Joint Venture, with CNL Income Fund
X, Ltd., a Florida limited partnership and affiliate of the General Partners.
The increase in net income earned by joint ventures during 1998, as compared to
1997, is primarily attributable to the fact that during 1998, the Partnership
reinvested a portion of the net sales proceeds from the 1997 sales of
Properties, in two Properties, with affiliates of the General Partners as
tenants-in-common. The increase in net income earned by joint ventures during
1998 is partially offset by, the fact that in January 1997, Show Low Joint
Venture, in which the Partnership owns a 64 percent interest, recognized a gain
of approximately $360,000 for financial reporting purposes from the sale of its
Property, as described above in "Capital
13
<PAGE>
Resources," above. Show Low Joint Venture reinvested the majority of the net
sales proceeds in an additional Property in June 1997.
During the year ended December 31, 1999, two of the Partnership's
lessees, Golden Corral Corporation and Restaurant Management Services, Inc.,
each contributed more than ten percent of the Partnership's total rental and
mortgage interest income (including the Partnership's share of rental income
from four Properties owned by joint ventures and six Properties owned with
affiliates of the General Partners as tenants-in-common). As of December 31,
1999, Golden Corral Corporation was the lessee under leases relating to five
restaurants and Restaurant Management Services, Inc. was the lessee under leases
relating to four restaurants. It is anticipated that, based on the minimum
annual rental payments required by the leases, these two lessees will continue
to contribute more than ten percent of the Partnership's total rental income
during 2000. In addition, during the year ended December 31, 1999, two
Restaurant Chains, Golden Corral, and Popeyes, each accounted for more than ten
percent of the Partnership's total rental and mortgage interest income
(including the Partnership's share of the rental income from four Properties
owned by joint ventures and six Properties owned with affiliates of the General
Partners as tenants-in-common). In 2000, it is anticipated that these two
Restaurant Chains each will continue to account for more than ten percent of the
total rental income to which the Partnership is entitled under the terms of its
leases. Any failure of these lessees or Restaurant Chains could materially
affect the Partnership's income if the Partnership is not able to re-lease the
Properties in a timely manner.
Operating expenses, including depreciation and amortization expense,
were $658,178, $558,525, and $598,098 for the years ended December 31, 1999,
1998, and 1997, respectively. The increase in operating expenses during 1999, as
compared to 1998, was primarily due to the Partnership incurring $128,330 in
transaction costs during 1999, relating to the General Partners retaining
financial and legal advisors to assist them in evaluating and negotiating the
proposed Merger with APF, as described below. in "Termination of Merger". The
decrease in operating expenses during 1998, as compared to 1997, is primarily
due to a decrease in depreciation expense as a result of the sales of several
Properties during 1997. The decrease is partially offset by an increase in
general operating and administrative expenses as a result of the Partnership
incurring certain repairs relating to the Property in Lombard, Illinois. The
Partnership has entered into a new lease for this Property and does not
anticipate incurring such expenses in the future periods.
The decrease in operating expenses during 1998, as compared to 1997, is
also partially offset by an increase as a result of the Partnership incurring
$16,208 in transaction costs relating to the proposed Merger with APF, as
described below.
The decrease in operating expenses during 1998, as compared to 1997, is
partially due to the fact that during 1997, the Partnership recorded bad debt
expense for past due rental amounts relating to the Property in Eagan,
Minnesota, due to financial difficulties of the tenant. This Property was sold
in June 1997, as described above in "Capital Resources."
During the year ended December 31, 1998, the Partnership recorded
deferred, subordinated real estate disposition fees of $45,150 payable to CNL
Fund Advisors, Inc. relating to the 1997 sales of the Properties in Avon Park,
Florida and Farmington Hills, Michigan. Initially, the Partnership considered
reinvesting the sales proceeds in additional Properties and therefore did not
include these amounts in the determination of the gain on sale for financial
reporting purposes during 1997. However, during the year ended December 31,
1998, the Partnership declared a special distribution of net sales proceeds from
these Properties payable to the Limited Partners. Accordingly, the Partnership
recorded these subordinated real estate disposition fees during the year ended
December 31, 1998. The payment of these fees is subordinated to the Limited
Partners receiving their cumulative 10% Preferred Return and their adjusted
capital contribution.
As a result of the sales of the Properties in Columbia, Missouri and
Littleton, Colorado, as described above in "Capital Resources", the Partnership
recognized a net gain totalling $113,167 for financial reporting purposes during
the year ended December 31, 1999. As a result of the sales of several
Properties, the Partnership recognized gains totalling $1,476,124 during the
year ended December 31, 1997, for financial reporting purposes. In addition, in
connection with the sale of the Properties in Farmington Hills, Michigan, during
1997, the Partnership also received $214,000 as a lease termination fee from the
former tenant in consideration of the Partnership's releasing the tenant
14
<PAGE>
from its obligation under the terms of the leases. No such transactions occurred
during the year ended December 31, 1998.
The Partnership's leases as of December 31, 1999, 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.
Termination of 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. Under the Agreement and Plan of Merger, APF
was to issue shares of its common stock as consideration for the Merger. On
March 1, 2000, the General Partners and APF announced that they had mutually
agreed to terminate the Agreement and Plan of Merger. The agreement to terminate
the Agreement and Plan of Merger was based, in large part, on the General
Partners' concern that, in light of market conditions relating to publicly
traded real estate investment trusts, the value of the transaction had
diminished. As a result of such diminishment, the General Partners' ability to
unequivocally recommend voting for the transaction, in the exercise of their
fiduciary duties, had become questionable.
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and
non-information technology systems to properly recognize and process
date-sensitive information beyond January 1, 2000. The failure to accurately
recognize the year 2000 could result in a variety of problems from data
miscalculations to the failure of entire systems.
Status
The Partnership generally does not directly own information technology
systems. The General Partners and their affiliates generally provide all
services requiring the use of information and some non-information technology
systems. In early 1998, affiliates of the General Partners formed a year 2000
committee ("the Y2K Team") that assessed the readiness of any systems that are
date sensitive and completed upgrades for the hardware equipment and software
that was not year 2000 compliant, as necessary. The cost for these upgrades and
other remedial measures is the responsibility of the General Partners and their
affiliates. The General Partners and their affiliates do not expect that the
Partnership will incur any costs in connection with the year 2000 remedial
measures. In addition, the Y2K Team requested and received certifications of
compliance from other companies with which the General Partners, their
affiliates, and the Partnership have material third party relationships.
In assessing the risks presented by the year 2000 problem, the Y2K Team
identified potential worst case scenarios involving the future of the
information and non-information technology systems used by the Partnership's
transfer agent, financial institutions and tenants. As of January 14, 2000, the
General Partners and their affiliates have tested the information and
non-information technology systems used by the Partnership and have not
experienced material disruption or other significant problems. In addition, as
of the same date, the General Partners are not aware of any material year 2000
problems relating to information and non-information technology systems of third
parties with which the Partnership maintains material relationships, including
those of the Partnership's transfer agent, financial institutions and tenants.
In addition, in the Partnership's interactions with its transfer agent,
financial institutions and tenants, the systems of these third parties have
functioned normally. Until the Partnership's first distribution in 2000 and the
delivery of the information by the transfer agent to stockholders in early 2000,
the General Partners will continue to monitor the year 2000 compliance of the
transfer agent. In addition, the General Partners will continue to monitor the
systems used by the Partnership and to maintain contact with third parties with
which the Partnership has material relationships with respect to year 2000
compliance and any year 2000 issues that may arise at a later date. The General
Partners will develop contingency plans relating to ongoing year 2000 issues at
the time that such issues are identified and such plans are deemed necessary.
15
<PAGE>
Based on the information provided to the Y2K Team, the upgrades and
remedial measures by the General Partners and their affiliates, and the normal
functioning to date of information and non-information technology systems used
by the Partnership and those third parties, the General Partners do not foresee
significant risks associated with its year 2000 compliance at this time. In
addition, the General Partners and their affiliates do not expect to incur any
additional costs in connection with the year 2000 remedial efforts. However,
there can be no assurance that the General Partners and their affiliates or any
third parties will not have ongoing year 2000 issues that may have adverse
effects on the Partnership.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
16
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CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONTENTS
--------
<TABLE>
<CAPTION>
Page
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<S> <C>
Report of Independent Certified Public Accountants 18
Financial Statements:
Balance Sheets 19
Statements of Income 20
Statements of Partners' Capital 21
Statements of Cash Flows 22
Notes to Financial Statements 24
</TABLE>
17
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Report of Independent Certified Public Accountants
--------------------------------------------------
To the Partners
CNL Income Fund II, Ltd.
In our opinion, the financial statements listed in the index appearing under
item 14(a)(1) present fairly, in all material respects, the financial position
of CNL Income Fund II, Ltd. (a Florida limited partnership) at December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedules listed in the index appearing
under item 14(a)(2) present fairly, in all material respects, the information
set forth therein when read in conjunction with the related financial
statements. These financial statements and financial statement schedules are the
responsibility of the Partnership's management; our responsibility is to express
an opinion on these financial statements and financial statement schedules based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 4, 2000, except for Note 11 for which the date is March 1, 2000
18
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------ -------------------
ASSETS
------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation $ 11,797,412 $ 12,835,304
Investment in joint ventures 5,079,701 4,353,427
Mortgage notes receivable -- 6,872
Cash and cash equivalents 904,715 889,891
Receivables, less allowance for doubtful
accounts of $78,690 and $55,435, in
1999 and 1998, respectively 33,849 122,560
Due from related party 3,108 --
Prepaid expenses 7,738 4,801
Lease costs, less accumulated amortization of
$13,306 and $14,889, in 1999 and 1998, 3,006 5,674
respectively
Accrued rental income 196,689 174,382
------------------ -------------------
$ 18,026,218 $ 18,392,911
================== ===================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 89,018 $ 4,621
Accrued and escrowed real estate taxes
payable 4,691 8,065
Distributions payable 515,629 515,629
Due to related parties 105,654 183,303
Rents paid in advance and deposits 33,483 40,412
------------------ -------------------
Total liabilities 748,475 752,030
Partners' capital 17,277,743 17,640,881
------------------ -------------------
$ 18,026,218 $ 18,392,911
================== ===================
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases $ 1,695,181 $ 1,773,925 $ 2,024,119
Contingent rental income 40,045 51,029 68,920
Interest and other income 68,948 80,486 64,900
--------------- -------------- ---------------
1,804,174 1,905,440 2,157,939
--------------- -------------- ---------------
Expenses:
General operating and administrative 126,990 160,220 137,924
Professional services 61,204 34,731 21,576
Bad debt expense -- -- 27,965
Real estate taxes -- -- 410
State and other taxes 15,711 14,733 10,403
Depreciation and amortization 325,943 332,633 399,820
Transaction costs 128,330 16,208 --
--------------- -------------- ---------------
658,178 558,525 598,098
--------------- -------------- ---------------
Income Before Equity in Earnings of Joint Ventures,
Gain on Sale of Land and Buildings, Real Estate
Disposition Fees, and Lease Termination Income 1,145,996 1,346,915 1,559,841
Equity in Earnings of Joint Ventures 440,215 431,974 389,915
Gain on Sale of Land and Buildings 113,167 -- 1,476,124
Real Estate Disposition Fees -- (45,150 ) --
Lease Termination Income -- -- 214,000
--------------- -------------- ---------------
Net Income $ 1,699,378 $ 1,733,739 $ 3,639,880
=============== ============== ===============
Allocation of Net Income:
General partners $ 14,888 $ 17,789 $ 30,736
Limited partners 1,684,490 1,715,950 3,609,144
--------------- -------------- ---------------
$ 1,699,378 $ 1,733,739 $ 3,639,880
=============== ============== ===============
Net Income Per Limited Partner Unit $ 33.69 $ 34.32 $ 72.18
=============== ============== ===============
Weighted Average Number of
Limited Partner Units Outstanding 50,000 50,000 50,000
=============== ============== ===============
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
-------------------------------
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
General Partners Limited Partners
-------------------------- --------------------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 162,000 $ 180,375 $ 25,000,000 $ (22,693,377) $17,978,593 $(2,689,822) $17,937,769
Distributions to limited
partners ($47.52 per
limited partner unit) -- -- -- (2,376,000) -- -- (2,376,000)
Net Income -- 30,736 -- -- 3,609,144 -- 3,639,880
------------- ----------- ------------- ------------- ----------- ----------- -----------
Balance, December 31, 1997 162,000 211,111 25,000,000 (25,069,377) 21,587,737 (2,689,822) 19,201,649
Distributions to limited
partners ($65.89 per
limited partner unit) -- -- -- (3,294,507) -- -- (3,294,507)
Net income -- 17,789 -- -- 1,715,950 -- 1,733,739
------------- ----------- ------------- ------------- ----------- ----------- -----------
Balance, December 31, 1998 162,000 228,900 25,000,000 (28,363,884) 23,303,687 (2,689,822) 17,640,881
Distributions to limited
partners ($41.25 per
limited partner unit) -- -- -- (2,062,516) -- -- (2,062,516)
Net income -- 14,888 -- -- 1,684,490 -- 1,699,378
------------- ----------- ------------- ------------- ----------- ----------- -----------
Balance, December 31, 1999 $ 162,000 $ 243,788 $ 25,000,000 $ (30,426,400) $24,988,177 $(2,689,822) $17,277,743
============= =========== ============= ============= =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants $ 1,816,812 $ 1,796,989 $ 2,054,519
Distributions from joint ventures 476,092 482,671 147,995
Cash paid for expenses (335,662) (227,335) (80,744)
Interest received 47,755 83,366 36,142
------------ ------------ ------------
Net cash provided by operating activities 2,004,997 2,135,691 2,157,912
------------ ------------ ------------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings 827,678 -- 4,659,078
Proceeds received from tenant in connection with
termination of leases -- -- 214,000
Additions to land and buildings on operating leases -- -- (29,526)
Investment in joint ventures (762,151) (835,969) (2,136,289)
Return of capital from joint venture -- -- 124,440
Collection on mortgage note receivable 6,816 35,183 --
Decrease (increase) in restricted cash -- 2,457,670 (2,457,670)
Payment of lease costs -- -- (4,507)
------------ ------------ ------------
Net cash provided by investing activities 72,343 1,656,884 369,526
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from loans from corporate general partner -- -- 721,000
Repayment of loans from corporate general partner -- -- (721,000)
Distributions to limited partners (2,062,516) (3,372,878) (2,376,000)
------------ ------------ ------------
Net cash used in financing activities (2,062,516) (3,372,878) (2,376,000)
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 14,824 419,697 151,438
------------ ------------ ------------
Cash and Cash Equivalents at Beginning of Year 889,891 470,194 318,756
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 904,715 $ 889,891 $ 470,194
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
--------------- -------------- -------------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash Provided
by Operating Activities:
Net Income $ 1,699,378 $ 1,733,739 $ 3,639,880
-------------- -------------- -------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 323,404 329,264 395,837
Amortization 2,539 3,369 3,983
Gain on sale of land and buildings (113,167) -- (1,476,124)
Bad debt expense -- -- 27,965
Lease termination income -- -- (214,000)
Equity in earnings of joint ventures, net of
distributions 35,877 50,697 (241,920)
Decrease (increase) in receivables 85,765 (28,799) (4,166)
Decrease (increase) in prepaid expenses (2,937) 709 (691)
Increase in accrued rental income (22,307) (26,279) (30,746)
Increase (decrease) in accounts payable
and accrued expenses 81,023 860 (2,304)
Increase (decrease) in due to related
parties (77,649) 57,019 81,206
Increase (decrease) in rents paid in
advance and deposits (6,929) 15,112 (21,008)
-------------- -------------- -------------
Total adjustments 305,619 401,952 (1,481,968)
-------------- -------------- -------------
Net Cash Provided by Operating Activities $ 2,004,997 $ 2,135,691 $ 2,157,912
============== ============== =============
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Mortgage note accepted as consideration in
sale of land and building $ -- $ -- $ 42,000
============== ============== =============
Deferred real estate disposition fees incurred
and unpaid at end of period $ -- $ 45,150 $ --
============== ============== =============
Distributions declared and unpaid at
December 31 $ 515,629 $ 515,629 $ 594,000
============== ============== =============
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Years Ended December 31, 1999, 1998, and 1997
1. Significant Accounting Policies:
-------------------------------
Organization and Nature of Business - CNL Income Fund II, Ltd. (the
-----------------------------------
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne.
Mr. Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate
General Partner. The general partners have responsibility for managing the
day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the acquisition
--------------------------------
of land and buildings at cost, including acquisition and closing costs.
Land and buildings are leased to unrelated third parties on a triple-net
basis, whereby the tenant is generally responsible for all operating
expenses relating to the property, including property taxes, insurance,
maintenance and repairs. The leases are accounted for using the operating
method. Under the operating method, land and building leases are recorded
at cost, revenue is recognized as rentals are earned and depreciation is
charged to operations as incurred. Buildings are depreciated on the
straight-line method over their estimated useful lives of 30 years. When
scheduled rentals vary during the lease term, income is recognized on a
straight-line basis so as to produce a constant periodic rent over the
lease term commencing on the date the property is placed in service.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
Whenever a tenant defaults under the terms of its lease, or events or
changes in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or reverses the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
plus any accrued rental income, are removed from the accounts and gains or
losses from sales are reflected in income. The general partners of the
Partnership review the properties for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable through operations.
24
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1999, 1998, and 1997
1. Significant Accounting Policies - Continued:
-------------------------------------------
The general partners determine whether an impairment in value has occurred
by comparing the estimated future undiscounted cash flows, including the
residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, a loss will be recorded for the
amount by which the carrying value of the asset exceeds its fair market
value. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general
partners' estimate of net cash flows expected to be generated from its
properties and the need for asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance
for doubtful accounts, which is netted against receivables, and to decrease
rental or other income or increase bad debt expense for the current period,
although the Partnership continues to pursue collection of such amounts. If
amounts are subsequently determined to be uncollectible, the corresponding
receivable and allowance for uncollectible accounts are decreased
accordingly.
Investment in Joint Ventures - The Partnership's investments in Kirkman
----------------------------
Road Joint Venture, Holland Joint Venture, Show Low Joint Venture, and
Peoria Joint Venture, and the properties in Arvada, Colorado; Mesa,
Arizona; Smithfield, North Carolina; Vancouver, Washington; Overland Park,
Kansas; and Memphis, Tennessee, each of which is held as tenants-in-common
with affiliates of the general partners, are accounted for using the equity
method since the Partnership shares control with affiliates which have the
same general partners.
Cash and Cash Equivalents - The Partnership considers all highly liquid
-------------------------
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Partnership has not experienced any losses in such
accounts. The Partnership limits investment of temporary cash investments
to financial institutions with high credit standing;
25
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1999, 1998, and 1997
1. Significant Accounting Policies - Continued:
-------------------------------------------
therefore, the Partnership believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Lease Costs - Lease incentive costs and brokerage and legal fees associated
-----------
with negotiating new leases are amortized over the terms of the new leases
using the straight-line method. When a property is sold or a lease is
terminated, the related lease cost, if any, net of accumulated amortization
is removed from the accounts and charged against income.
Income Taxes - Under Section 701 of the Internal Revenue Code, all income,
------------
expenses and tax credit items flow through to the partners for tax
purposes. Therefore, no provision for federal income taxes is provided in
the accompanying financial statements. The Partnership is subject to
certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against
partners' capital and represent a reduction of Partnership equity and a
reduction in the basis of each partner's investment.
Use of Estimates - The general partners of the Partnership have made a
----------------
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally accepted
accounting principles. The more significant areas requiring the use of
management estimates relate to the allowance for doubtful accounts and
future cash flows associated with long-lived assets. Actual results could
differ from those estimates.
2. Leases:
------
The Partnership leases its land or land and buildings primarily to
operators of national and regional fast-food restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases have been classified
as operating leases. Substantially all leases are for 15 to 20 years and
provide for minimum and contingent rentals. In addition, the tenant
generally pays all property taxes and assessments, fully maintains the
interior and exterior of the building and carries insurance coverage for
public liability, property damage, fire and extended coverage.
26
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1999, 1998, and 1997
2. Leases - Continued:
------------------
The lease options generally allow tenants to renew the leases for two to
four successive five-year periods subject to the same terms and conditions
as the initial lease. Most leases also allow the tenant to purchase the
property at fair market value after a specified portion of the lease has
elapsed.
3. Land and Buildings on Operating Leases:
--------------------------------------
Land and buildings on operating leases consisted of the following at
December 31:
1999 1998
---------------- --------------
Land $ 6,180,616 $ 6,608,400
Buildings 9,384,265 9,858,263
---------------- --------------
15,564,881 16,466,663
Less accumulated depreciation (3,767,469) (3,631,359)
---------------- --------------
$ 11,797,412 $12,835,304
================ ==============
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. In November 1999, the Partnership reinvested these net sales
proceeds in Peoria Joint Venture (see Note 4).
In addition, during November 1999, the Partnership sold its property in
Littleton, Colorado to a unrelated third party and received net sales
proceeds of $150,000, resulting in a loss of $79,585 for financial
reporting purposes. In November 1999, the Partnership reinvested these net
sales proceeds in Peoria Joint Venture (see Note 4).
Some of the leases provide for escalating guaranteed minimum rents
throughout the lease terms. Income from these scheduled rent increases is
recognized on a straight-line basis over the terms of the leases. For the
years ended December 31, 1999, 1998, and 1997, the Partnership recognized
$22,307, $26,279, and $30,746, respectively, of such income.
27
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1999, 1998, and 1997
3. Land and Buildings on Operating Leases - Continued:
--------------------------------------------------
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1999:
2000 $ 1,586,166
2001 1,601,997
2002 1,439,904
2003 1,242,947
2004 1,214,332
Thereafter 3,978,733
------------
$11,064,079
============
Since lease renewal periods are exercisable at the option of the tenant,
the above table only presents future minimum lease payments due during the
initial lease terms. In addition, this table does not include any amounts
for future contingent rentals which may be received on the leases based on
a percentage of the tenant's gross sales.
4. Investment in Joint Ventures:
----------------------------
The Partnership has a 50 percent, 49 percent, 64 percent and 48 percent
interest in the profits and losses of Kirkman Road Joint Venture, Holland
Joint Venture, Show Low Joint Venture, and Peoria Joint Venture,
respectively. The remaining interests in Holland Joint Venture and Show Low
Joint Venture are held by affiliates of the general partners. The
Partnership also has a 33.87% interest in a property in Arvada, Colorado,
with an affiliate of the general partners, as tenants-in-common. Amounts
relating to its investment are included in investment in joint ventures.
In January 1998, the Partnership used the net sales proceeds from the sales
of the properties in Jacksonville, Florida and Mathis, Texas, to acquire a
39.39% and a 13.38% interest in a property in Overland Park, Kansas, and a
property in Memphis, Tennessee, respectively, as tenants-in-common with
affiliates of the general partners.
28
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1999, 1998, and 1997
4. Investment in Joint Ventures - Continued:
----------------------------------------
In November 1999, the Partnership entered into a joint venture arrangement,
Peoria Joint Venture, with CNL Income Fund X, Ltd., a Florida limited
partnership and affiliate of the general partners, to purchase and hold one
restaurant property. As of December 31, 1999, the Partnership had
contributed approximately $762,200 to the joint venture and owned a 48
percent interest in the profits and losses of the joint venture.
Kirkman Road Joint Venture, Holland Joint Venture, Show Low Joint Venture,
Peoria Joint Venture and the Partnership and affiliates, as tenants-in-
common in six separate tenancy-in-common arrangements, each own and lease
one property to an operator of national fast-food or family-style
restaurants. The following presents the combined, condensed financial
information for the joint ventures and the six properties held as tenants-
in-common with affiliates at December 31:
1999 1998
------------- ------------
Land and buildings on operating
leases, less accumulated
depreciation $ 8,691,580 $ 8,410,940
Net investment in direct financing
leases 3,236,337 2,121,822
Cash 29,599 37,128
Receivables 24,059 1,570
Accrued rental income 303,403 207,239
Other assets 1,684 1,069
Liabilities 33,889 32,229
Partners' capital 12,252,773 10,747,539
Revenues 1,272,883 1,254,276
Net income 1,072,398 1,051,988
The Partnership recognized income totalling $440,215, $431,974, and
$389,915 for the years ended December 31, 1999, 1998 and 1997,
respectively, from these joint ventures and the properties held as tenants-
in-common with affiliates of the general partners.
29
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1999, 1998, and 1997
5. Mortgage Note Receivable:
------------------------
In connection with the sale in June 1997 of its property in Eagan,
Minnesota, the Partnership accepted a promissory note in the amount of
$42,000. The promissory note bore interest at a rate of 10.50% per annum
and was collateralized by personal property. Initially, the note was to be
collected in 18 monthly installments of interest only and thereafter, the
entire principal balance shall become due. During 1998, the note was
amended to require six monthly installments of $7,368, including interest,
commencing on July 1, 1998. As of December 31, 1998, the mortgage note
receivable balance was $6,872, including accrued interest of $56. As of
December 31, 1999, the Partnership collected the balance in full.
6. Receivables:
-----------
In March 1996, the Partnership accepted a promissory note from the former
tenant of the property in Gainesville, Texas, in the amount of $96,502,
representing past due rental and other amounts, which had been included in
receivables and for which the Partnership had established an allowance for
doubtful accounts, and real estate taxes previously recorded as an expense
by the Partnership. Payments are due in 60 monthly installments of $2,156,
including interest at a rate of 11 percent per annum, commencing on June 1,
1996. Due to the uncertainty of the collectibility of this note, the
Partnership established an allowance for doubtful accounts and is
recognizing income as collected. As of December 31, 1999 and 1998, the
balances in the allowance for doubtful accounts of $58,696 and $55,330,
respectively, including accrued interest of $7,136 and $2,654,
respectively, represent the uncollected amounts under this promissory note.
7. Allocations and Distributions:
-----------------------------
Generally, all net income and net losses of the Partnership, excluding
gains and losses from the sale of properties, are allocated 99 percent to
the limited partners and one percent to the general partners. Distributions
of net cash flow are made 99 percent to the limited partners and one
percent to the general partners; provided, however, that the one percent of
net cash flow to be distributed to the general partners is subordinated to
receipt by the limited partners of an aggregate, ten percent,
noncumulative, noncompounded annual return on their adjusted capital
contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in
liquidation of the Partnership, to the extent distributed, will be
distributed first to the limited partners in an amount sufficient to
provide them with their cumulative 10% Preferred Return, plus the
30
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1999, 1998, and 1997
7. Allocations and Distributions - Continued:
-----------------------------------------
return of their adjusted capital contributions. The general partners will
then receive, to the extent previously subordinated and unpaid, a one
percent interest in all prior distributions of net cash flow and a return
of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the
general partners. Any gain from the sale of a property not in liquidation
of the Partnership is, in general, allocated in the same manner as net
sales proceeds are distributable. Any loss from the sale of a property is,
in general, allocated first on a pro rata basis to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the
limited partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will
be used in the following order: (i) first to pay and discharge all of the
Partnership's liabilities to creditors, (ii) second, to establish reserves
that may be deemed necessary for any anticipated or unforeseen liabilities
or obligations of the Partnership, (iii) third, to pay all of the
Partnership's liabilities, if any, to the general and limited partners,
(iv) fourth, after allocations of net income, gains and/or losses, to
distribute to the partners with positive capital accounts balances, in
proportion to such balances, up to amounts sufficient to reduce such
positive balances to zero, and (v) thereafter, any funds remaining shall
then be distributed 95 percent to the limited partners and five percent to
the general partners.
During the years ended December 31, 1999, 1998, and 1997, the Partnership
declared distributions to the limited partners of $2,062,516, $3,294,507,
and $2,376,000, respectively. Distributions for the year ended December 31,
1998, included $1,232,003 as a result of the distribution of net sales
proceeds from the 1997 sales of properties in Avon Park, Florida and
Farmington Hills, Michigan. This amount was applied toward the limited
partners cumulative 10% Preferred Return. No distributions have been made
to the general partners to date.
31
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1999, 1998, and 1997
8. Income Taxes:
------------
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
Net income for financial reporting purposes $ 1,699,378 $ 1,733,739 $ 3,639,880
Depreciation for financial reporting purposes in
excess of depreciation for tax reporting
purposes 16,973 17,510 19,440
Gain on sale of land and buildings for financial
reporting purposes (in excess of) less than
gain for tax reporting purposes (9,342) 335,644 (638,739)
Equity in earnings of joint ventures for tax
reporting purposes less than equity in
earnings of joint ventures for financial
reporting purposes (35,096) (32,934) (146,161)
Capitalization of transaction costs for tax
reporting purposes 128,330 16,208 --
Allowance for doubtful accounts 23,255 (27,819) (42,782)
Accrued rental income (22,307) (26,279) (30,746)
Rents paid in advance (4,927) 18,112 (21,008)
------------- ------------- -------------
Net income for federal income tax purposes $ 1,796,264 $ 2,034,181 $ 2,779,884
============= ============= =============
</TABLE>
9. Related Party Transactions:
--------------------------
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Holdings, Inc. The other individual general
partner, Robert A. Bourne, serves as President and Treasurer of CNL
Financial Group, Inc., a wholly owned subsidiary of CNL Holdings, Inc., CNL
Fund Advisors, Inc. (the "Advisor") was a majority owned subsidiary of CNL
Financial Group, Inc. until it merged with CNL American Properties Fund,
Inc. ("APF"), effective September 1, 1999. The individual general partners
are stockholders and directors of APF.
32
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1999, 1998, and 1997
9. Related Party Transactions- Continued:
-------------------------------------
The Advisor provides certain services relating to management of the
Partnership and its properties pursuant to a management agreement with the
partnership. In connection therewith, the Partnership agreed to pay the
Advisor an annual, noncumulative, subordinated property management fee of
one-half of one percent of the Partnership assets under management (valued
at cost) annually. The property management fee is limited to one percent of
the sum of gross operating revenues from properties wholly owned by the
Partnership and the Partnership's allocable share of gross operating
revenues from joint ventures and the properties held as tenants-in-common
with affiliates or competitive fees for comparable services. In addition,
these fees will be incurred and will be payable only after the limited
partners receive their aggregate, noncumulative 10% Preferred Return. Due
to the fact that these fees are noncumulative, if the limited partners do
not receive their 10% Preferred Return in any particular year, no property
management fees will be due or payable for such year. As a result of such
threshold no property management fees were incurred during the years ended
December 31, 1999, 1998, and 1997.
The Advisor is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties
based on the lesser of one-half of a competitive real estate commission or
three percent of the sales price if the Advisor provides a substantial
amount of services in connection with the sale. Payment of the real estate
disposition fee is subordinated to the receipt by the limited partners of
their aggregate, cumulative 10% Preferred Return, plus their adjusted
capital contributions. During the year ended December 31, 1998, the
Partnership incurred $45,150 in deferred, subordinated, real estate
disposition fees as a result of the 1997 sales of properties in Avon Park,
Florida and Farmington Hills, Michigan. No deferred, subordinated, real
estate disposition fees were incurred for the years ended December 31, 1999
and 1997.
33
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1999, 1998, and 1997
9. Related Party Transactions- Continued:
-------------------------------------
During the years ended December 31, 1999, 1998, and 1997, the Advisor and
its affiliates provided accounting and administrative services to the
Partnership on a day-to-day basis including services relating to the
proposed and terminated merger as described in Note 11. The Partnership
incurred $97,053, $86,009, and $78,139 for the years ended December 31,
1999, 1998, and 1997, respectively, for such services.
The due to related parties consisted of the following at December 31:
1999 1998
------------- -------------
Due to Advisor and its affiliates:
Expenditures incurred on behalf
of the Partnership $ 9,712 $ 76,326
Accounting and administrative
services 50,792 61,827
Deferred, subordinated real
estate disposition fee 45,150 45,150
------------- -------------
$ 105,654 $ 183,303
============= ============
34
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1999, 1998, and 1997
10. Concentration of Credit Risk:
----------------------------
The following schedule presents total rental and mortgage interest income
from individual lessees, each representing more than ten percent of the
Partnerships' total rental income (including the Partnership's share of
rental income from joint ventures and the properties held as tenants-in-
common with affiliates of the general partners) for each of the years ended
December 31:
1999 1998 1997
-------- -------- ---------
Golden Corral Corporation $424,944 $485,839 $408,333
Restaurant Management Services, Inc. 253,628 252,292 251,480
In addition, the following schedule presents total rental and mortgage
interest income from individual restaurant chains, each representing more
than ten percent of the Partnership's total rental and mortgage interest
income (including the Partnership's share of rental income from joint
ventures and properties held as tenants-in-common with affiliates of the
general partners) for each of the years ended December 31:
1999 1998 1997
-------- --------- ---------
Golden Corral Family $424,944 $ 485,839 $ 408,333
Steakhouse Restaurants
Popeyes Famous Fried
Chicken Restaurants 253,628 252,292 251,480
Wendy's Old Fashioned
Hamburger Restaurants N/A N/A 381,567
KFC N/A N/A 278,348
The information denoted by N/A indicates that for each period presented,
the tenant and the chains did not represent more than ten percent of the
Partnership's total rental, mortgage interest, and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of
restaurant concepts, default by any one of these lessees or restaurant
chains could significantly impact the results of operations of the
Partnership if the Partnership is not able to re-lease the properties in a
timely manner.
35
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1999, 1998, and 1997
11. Termination of 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. Under the Agreement and Plan of Merger, APF
was to issue shares of its common stock as consideration for the Merger. On
March 1, 2000, the General Partners and APF announced that they had
mutually agreed to terminate the Agreement and Plan of Merger. The
agreement to terminate the Agreement and Plan of Merger was based, in large
part, on the General Partners' concern that, in light of market conditions
relating to publicly traded real estate investment trusts, the value of the
transaction had diminished. As a result of such diminishment, the General
Partners' ability to unequivocally recommend voting for the transaction, in
the exercise of their fiduciary duties, had become questionable.
36
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partners of the Registrant are James M. Seneff, Jr., Robert
A. Bourne and CNL Realty Corporation, a Florida corporation. The General
Partners manage and control the Partnership's affairs and have general
responsibility and the ultimate authority in all matters affecting the
Partnership's business. The Partnership has available to it the services,
personnel and experience of CNL Fund Advisors, Inc., CNL Financial Group, Inc.
and their affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 53, Since 1971, Mr. Seneff has been active in
the acquisition, development, and management of real estate projects and,
directly or through an affiliated entity, has served as a general partner or
co-venturer in over 100 real estate ventures. These ventures have involved the
financing, acquisition, construction, and leasing of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Mr. Seneff is a
principal stockholder of CNL Holdings, Inc., the parent company of CNL Financial
Group, Inc. (formerly CNL Group, Inc.), a diversified real estate company, and
has served as a director, Chairman of the Board and Chief Executive Officer of
CNL Financial Group, Inc. since its formation in 1980. Mr. Seneff has served as
a director and Chairman of the Board since inception in 1994, and served as
Chief Executive Officer from 1994 through August 1999, of CNL American
Properties Fund, Inc., a public, unlisted real estate investment trust. He also
served as a director, Chairman of the Board and Chief Executive Officer of CNL
Fund Advisors, Inc., the advisor to CNL American Properties Fund, Inc. until it
merged with the company in September 1999. In addition, he serves as a director,
Chairman of the Board and Chief Executive Officer of CNL Health Care Properties,
Inc., as well as CNL Health Care Corp., the advisor to the company. He also
serves as director, Chairman of the Board and Chief Executive Officer of CNL
Hospitality Properties, Inc., a public, unlisted real estate investment trust,
as well as CNL Hospitality Corp., its advisor. Since 1992, Mr. Seneff has served
as Chairman of the Board and Chief Executive Officer of Commercial Net Lease
Realty, Inc., a public real estate investment trust that is listed on the New
York Stock Exchange. Mr. Seneff has also served as a director, Chairman of the
Board and Chief Executive Officer of the following affiliated companies since
formation: CNL Securities Corp., since 1979; CNL Investment Company, since 1990;
and CNL Institutional Advisors, a registered investment advisor for pension
plans, since 1990. Mr. Seneff formerly served as a director of First Union
National Bank of Florida, N.A., and currently serves as the Chairman of the
Board of CNLBank. Mr. Seneff served on the Florida State Commission on Ethics
and is a former member and past Chairman of the State of Florida Investment
Advisory Council, which recommends to the Florida Board of Administration
investments for various Florida employee retirement funds. The Florida Board of
Administration is Florida's principal investment advisory and money management
agency and oversees the investment of more than $60 billion of retirement funds.
Mr. Seneff received his degree in Business Administration from Florida State
University in 1968.
Robert A. Bourne, age 52, Since joining CNL Securities Corp. in 1979,
Mr. Bourne has participated as a general partner or co-venturer in over 100 real
estate ventures involved in the financing, acquisition, construction, and
leasing of restaurants, office buildings, apartment complexes, hotels, and other
real estate. Mr. Bourne is the President and Treasurer of CNL Financial Group,
Inc. (formerly CNL Group, Inc.). Mr. Bourne has served as a director since
inception in 1994, President from 1994 through February 1999, Treasurer from
February 1999 through August 1999, and Vice Chairman of the Board since February
1999 of CNL American Properties Fund, Inc., a public, unlisted real estate
investment trust. He also served in the following positions for CNL Fund
Advisors, Inc., the advisor to CNL American Properties Fund, Inc. prior to its
merger with CNL American Properties Fund, Inc.: director from 1994 through
August 1999, Treasurer from July 1998 through August 1999, President from 1994
through September 1997, and Vice Chairman of the Board from September 1997
through August 1999. Mr. Bourne is a director and President of CNL Health Care
Properties, Inc., as well as a director and President of CNL Health Care Corp.,
the advisor to the
37
<PAGE>
company. He is also a director, Vice Chairman of the Board and President of CNL
Hospitality Properties, Inc., a public, unlisted real estate investment trust,
as well as CNL Hospitality Corp., its advisor. Mr. Bourne also serves as a
director of CNLBank. He has served as a director since 1992, Vice Chairman of
the Board since February 1996, Secretary and Treasurer from February 1996
through 1997, and President from July 1992 through February 1996, of Commercial
Net Lease Realty Inc., a public real estate investment trust listed on the New
York Stock Exchange. Mr. Bourne holds the following positions for these
affiliates of CNL Financial Group, Inc.: director, President and Treasurer of
CNL Investment Company; director, President, Treasurer, and Registered Principal
of CNL Securities Corp., a subsidiary of CNL Investment Company and director,
President, Treasurer, and Chief Investment Officer of CNL Institutional
Advisors, Inc., a registered investment advisor for pension plans. Mr. Bourne
began his career as a certified public accountant employed by Coopers & Lybrand,
Certified Public Accountants, from 1971 through 1978, where he attained the
position of tax manager in 1975. Mr. Bourne graduated from Florida State
University in 1970 where he received a B.A. in Accounting, with honors.
CNL Realty Corporation is a corporation organized on November 26, 1985,
under the laws of the State of Florida. Its sole directors and shareholders are
James M. Seneff, Jr. and Robert A. Bourne, the individual General Partners. CNL
Realty Corporation was organized to serve as the corporate general partner of
real estate limited partnerships, such as the Partnership, organized by one or
both of the individual General Partners. CNL Realty Corporation currently serves
as the corporate general partner of the CNL Income Fund Partnerships.
CNL Fund Advisors, Inc. provides certain management services in
connection with the Partnership and its Properties. CNL Fund Advisors, Inc. is a
corporation organized in 1994 under the laws of the State of Florida, and its
principal office is located at 450 South Orange Avenue, Orlando, Florida 32801.
CNL Fund Advisors, Inc. was a majority owned subsidiary of CNL Financial Group,
Inc., until its merger effective September 1, 1999. On September 1, 1999, CNL
American Properties Fund, Inc. acquired CNL Fund Advisors, Inc. and was
organized to perform property acquisition, property management and other
services.
CNL Financial Group, Inc., which was the parent company of CNL Fund
Advisors, Inc. through August 1999, was organized in 1980 under the laws of the
State of Florida. CNL Financial Group, Inc. is a diversified real estate company
which provides a wide range of real estate, development and financial services
to companies in the United States through the activities of its subsidiaries.
These activities are primarily focused on the franchised restaurant and
hospitality industries. James M. Seneff, Jr., an individual General Partner of
the Partnership, is the Chairman of the Board, Chief Executive Officer, and a
director of CNL Financial Group, Inc. Mr. Seneff and his wife own all of the
outstanding shares of CNL Holdings, Inc., the Parent company of CNL Financial
Group, Inc.
The following persons serve as operating officers of CNL Financial
Group, Inc. or its affiliates or subsidiaries in the discretion of the Boards of
Directors of those companies, but, except as specifically indicated, do not
serve as members of the Boards of Directors of those entities. The Boards of
Directors have the responsibility for creating and implementing the policies of
CNL Financial Group, Inc. and its affiliated companies.
Curtis B. McWilliams, age 44, joined CNL Financial Group, Inc. in April
1997 and served as an Executive Vice President through August 1999. He serves as
Chief Executive Officer of CNL American Properties Fund, Inc. and CNL Fund
Advisors, Inc. In addition, Mr. McWilliams served as President of CNL Fund
Advisors, Inc. and as President of the Restaurant and Financial Services Groups
within CNL Financial Group, Inc. through August 1999. Mr. McWilliams served as
President of CNL American Properties Fund, Inc. from February 1999 through
August 1999 and previously served as Executive Vice President from February 1998
through February 1999. From September 1983 through March 1997, Mr. McWilliams
was employed by Merrill Lynch & Co., most recently as Chairman of Merrill
Lynch's Private Advisory Services until March 1997. Mr. McWilliams received a
B.S.E. in Chemical Engineering from Princeton University in 1977 and a Masters
of Business Administration with a concentration in finance from the University
of Chicago in 1983.
John T. Walker, age 41, serves as President and Chief Operating Officer
of CNL American Properties Fund, Inc. and CNL Fund Advisors, Inc. He served as
Executive Vice President of CNL American Properties Fund, Inc. from January 1996
through August 1999, as Chief Operating Officer since March 1995 through August
1999, and previously served as Senior Vice President from December 1994 through
August 1999. In addition, Mr. Walker has served as Executive Vice President of
CNL Fund Advisors, Inc. since January 1996 through August 1999, Chief Operating
Officer from April 1995 through August 1999, and previously served as Senior
Vice President from
38
<PAGE>
November 1994 through January 1996. In addition, Mr. Walker previously served as
Executive Vice President of CNL Hospitality Properties, Inc. and CNL Hospitality
Advisors, Inc. As of September 1, 1999, Mr. Walker serves as President for CNL
American Properties Fund, Inc. From May 1992 to May 1994, Mr. Walker, a
certified public accountant, was Executive Vice President for Finance and
Administration and Chief Financial Officer of Z Music, Inc., a cable television
network (subsequently acquired by Gaylord Entertainment), where he was
responsible for overall financial and administrative management and planning.
From January 1990 through April 1992, Mr. Walker was Chief Financial Officer of
the First Baptist Church in Orlando, Florida. From April 1984 through December
1989, he was a partner in the accounting firm of Chastang, Ferrell & Walker,
P.A., where he was the partner in charge of audit and consulting services, and
from 1981 to 1984, Mr. Walker was a Senior Consultant/Audit Senior at Price
Waterhouse. Mr. Walker is a Cum Laude graduate of Wake Forest University with a
B.S. in Accountancy and is a certified public accountant.
Lynn E. Rose, age 51, Ms. Rose served as Secretary of CNL American
Properties Fund, Inc., a public, unlisted real estate investment trust, from
1994 through August 1999, and served as Treasurer from 1994 through February
1999. She also served as Treasurer of CNL Fund Advisors, Inc., from 1994 through
July 1998, and served as Secretary and a director from 1994 through August 1999,
at which point it merged with CNL American Properties Fund, Inc. In addition,
she is Secretary and Treasurer of CNL Health Care Properties, Inc., and serves
as Secretary of its subsidiaries. In addition, she serves as Secretary,
Treasurer and a director of CNL Health Care Corp., the advisor. to the company.
Ms. Rose also serves as Secretary and Treasurer of CNL Hospitality Properties,
Inc., a public, unlisted real estate investment trust, as Secretary, Treasurer
and a director of CNL Hospitality Corp., its Advisor, and as Secretary of the
subsidiaries of the company. Ms. Rose served as Secretary and Treasurer of
Commercial Net Lease Realty, Inc., a public real estate investment trust listed
on the New York Stock Exchange, from 1992 to February 1996, and as Secretary and
a director of CNL Realty Advisors, Inc., its advisor, from its inception in 1991
through 1997. She also served as Treasurer of CNL Realty Advisors, Inc. from
1991 through February 1996. Ms. Rose, a certified public accountant, has served
as Secretary of CNL Financial Group, Inc. (formerly CNL Group, Inc.) since 1987,
served as Controller from 1987 to 1993 and has served as Chief Financial Officer
since 1993. She also serves as Secretary of the subsidiaries of CNL Financial
Group, Inc. and holds various other offices in the subsidiaries. In addition,
she serves as Secretary for approximately 50 additional corporations affiliated
with CNL Financial Group, Inc. and its subsidiaries. Ms. Rose oversees the tax
and legal compliance for over 375 corporations, partnerships and joint ventures,
and the accounting and financial reporting for over 200 entities. Prior to
joining CNL, Ms. Rose was a partner with Robert A. Bourne in the accounting firm
of Bourne & Rose, P.A., Certified Public Accountants. Ms. Rose holds a B.A. in
Sociology from the University of Central Florida. She was licensed as a
certified public accountant in 1979.
Jeanne A. Wall, age 41, Ms. Wall served as Executive Vice President of
CNL American Properties Fund, Inc., a public, unlisted real estate investment
trust, from 1994 through August 1999, and as Executive Vice President of CNL
Fund Advisors, Inc., its advisor, from 1994 through August 1999, at which point
it merged with CNL American Properties Fund, Inc. Ms. Wall also serves as
Executive Vice President of CNL Health Care Properties, Inc. and CNL Health Care
Corp., the Advisor to the Company. Ms. Wall also serves as Executive Vice
President of CNL Hospitality Properties, Inc., a public, unlisted real estate
investment trust, and serves as Executive Vice President and a director of CNL
Hospitality Corp., its advisor. She also serves as a director for CNLBank. Ms.
Wall serves as Executive Vice President of CNL Financial Group, Inc. (formerly
CNL Group, Inc.). Ms. Wall has served as Chief Operating Officer of CNL
Investment Company and of CNL Securities Corp. since 1994 and has served as
Executive Vice President of CNL Investment Company since January 1991. In 1984,
Ms. Wall joined CNL Securities Corp. and in 1985, became Vice President. In
1987, she became a Senior Vice President and in July 1997, became Executive Vice
President of CNL Securities Corp. In this capacity, Ms. Wall serves as national
marketing and sales director and oversees the national marketing plan for the
CNL investment programs. In addition, Ms. Wall oversees product development,
communications and investor services for programs offered through participating
brokers. Ms. Wall also served as Senior Vice President of CNL Institutional
Advisors Inc., a registered investment advisor, from 1990 to 1993. Ms. Wall
served as Vice President of Commercial Net Lease Realty, Inc., a public real
estate investment trust listed on the New York Stock Exchange, from 1992 through
1997, and served as Vice President of CNL Realty Advisors, Inc. from its
inception in 1991 through 1997. Ms. Wall currently serves as a trustee on the
Board of the Investment Program Association, is a member of the Corporate
Advisory Council for the International Association for Financial Planning and is
a member of IWF, International Women's Forum. In addition, she previously served
on the Direct Participation Program committee for the National Association of
Securities Dealers, Inc. Ms. Wall holds a B.A. in Business Administration from
Linfield College and is a registered principal of CNL Securities Corp.
39
<PAGE>
Steven D. Shackelford, age 36, a certified public accountant, serves as
Senior Vice President, Chief Financial Officer, and Secretary of CNL American
Properties Fund, Inc. and CNL Fund Advisors, Inc. He served as Chief Financial
Officer of CNL American Properties Fund, Inc. from January 1997 and as Chief
Financial Officer of CNL Fund Advisors, Inc. since September 1996 through August
1999. From March 1995 to July 1996, Mr. Shackelford was a senior manager in the
national office of Price Waterhouse where he was responsible for advising
foreign clients seeking to raise capital and a public listing in the United
States. From August 1992 to March 1995, he served as a manager in the Price
Waterhouse, Paris, France office serving several multinational clients. Mr.
Shackelford was an audit staff and audit senior from 1986 to 1992 in the
Orlando, Florida office of Price Waterhouse. Mr. Shackelford received a B.A. in
Accounting, with honors, and a Masters of Business Administration from Florida
State University.
Item 11. Executive Compensation
Other than as described in Item 13, the Partnership has not paid and
does not intend to pay any executive compensation to the General Partners or any
of their affiliates. There are no compensatory plans or arrangements regarding
termination of employment or change of control.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 15, 2000, no person was known to the Registrant to be a
beneficial owner of more than five percent of the Units.
The following table sets forth, as of March 15, 2000, the beneficial
ownership interests of the General Partners in the Registrant.
Title of Class Name of Partner Percent of Class
-------------- --------------- ----------------
General Partnership Interests James M. Seneff, Jr. 45%
Robert A. Bourne 45%
CNL Realty Corporation 10%
------
100%
======
Neither the General Partners, nor any of their affiliates, owns any
interest in the Registrant, except as noted above.
40
<PAGE>
Item 13. Certain Relationships and Related Transactions
The table below summarizes the types, recipients, methods of
computation and amounts of compensation, fees and distributions paid or payable
by the Partnership to the General Partners and their affiliates for the year
ended December 31, 1999, exclusive of any distributions to which the General
Partners or their affiliates may be entitled by reason of their purchase and
ownership of Units.
<TABLE>
<CAPTION>
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 1999
- ---------------------------------- -------------------------------------- ------------------------------
<S> <C> <C>
Reimbursement to affiliates for Operating expenses are reimbursed at Operating expenses incurred
operating expenses the lower of cost or 90 percent of the on behalf of the Partnership:
prevailing rate at which comparable $138,190
services could have been obtained in
the same geographic area. If the Accounting and administrative
General Partners or their affiliates services: $97,053
loan funds to the Partnership, the
General Partners or their affiliates
will be reimbursed for the interest
and fees charged to them by the
unaffiliated lenders for such loans.
Affiliates of the General Partners
from time to time incur certain
operating expenses on behalf of the
Partnership for which the Partnership
reimburses the affiliates without
interest.
Annual, subordinated property One-half of one percent per year of $-0-
management fee to affiliates Partnership assets under management
(valued at cost), subordinated to
certain minimum returns to the Limited
Partners. The property management fee
will not exceed the lesser of one
percent of gross operating revenues or
competitive fees for comparable
services. Due to the fact that these
fees are noncumulative if the Limited
Partners do not receive their 10%
Preferred Return in any particular
year no property management fees will
be due or payable for such year.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 1999
- --------------------------------- -------------------------------------- ------------------------------
<S> <C> <C>
Deferred, subordinated real A deferred, subordinated real estate $-0-
estate disposition fee payable disposition fee, payable upon sale
to affiliates of one or more Properties, in an
amount equal to the lesser of (i) one-
half of a competitive real estate
commission, or (ii) three percent of
the sales price of such Property or
Properties. Payment of such fee shall
be made only if affiliates of the
General Partners provide a substantial
amount of services in connection with
the sale of a Property or Properties
and shall be subordinated to certain
minimum returns to the Limited
Partners. However, if the net sales
are reinvested in a replacement
Property, no such real estate
disposition fee will be incurred until
such replacement Property is sold and
the net sales proceeds are
distributed.
General Partners' deferred, A deferred, subordinated share equal $-0-
subordinated share of to one percent of Partnership
Partnership net cash flow distributions of net cash flow,
subordinated to certain minimum
returns to the Limited Partners.
General Partners' deferred, A deferred, subordinated share equal $-0-
subordinated share of Partnership to five percent of Partnership
net sales proceeds from a sale distributions of such net sales
or sales not in liquidation proceeds, subordinated to certain
of the Partnership minimum returns to the Limited
Partners.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 1999
- --------------------------------- -------------------------------------- ------------------------------
<S> <C> <C>
General Partners' share of Distributions of net sales proceeds $-0-
Partnership net sales proceeds from a sale or sales of substantially
from a sale or sales in all of the Partnership's assets
liquidation of the Partnership will be distributed in the following
order or priority: (i) first, to pay
all debts and liabilities of the
Partnership and to establish reserves;
(ii) second, to Partners with positive
capital account balances, determined
after the allocation of net income,
net loss, gain and loss, in proportion
to such balances, up to amounts
sufficient to reduce such balances to
zero; and (iii) thereafter, 95% to the
Limited Partners and 5% to the General
Partners.
</TABLE>
43
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 1999 and 1998
Statements of Income for the years ended December 31, 1999,
1998, and 1997
Statements of Partners' Capital for the years ended December
31, 1999, 1998, and 1997
Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1999, 1998, and 1997
Schedule III - Real Estate and Accumulated Depreciation at
December 31, 1999
Notes to Schedule III - Real Estate and Accumulated
Depreciation at December 31, 1999
Schedule IV - Mortgage Loans on Real Estate at December 31,
1999
Allother Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or
notes thereto.
3. Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund
II, Ltd. (Included as Exhibit 3.1 to Amendment No. 1
to Registration Statement No. 33-10351 on Form S-11
and incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of
Limited Partnership of CNL Income Fund II, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with the
Securities and Exchange Commission on April 2, 1993,
and incorporated herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund
II, Ltd. (Included as Exhibit 4.1 to Amendment No. 1
to Registration Statement No. 33-10351 on Form S-11
and incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of
Limited Partnership of CNL Income Fund II, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with the
Securities and Exchange Commission on April 2, 1993,
and incorporated herein by reference.)
44
<PAGE>
10.1 Property Management Agreement (Included as Exhibit
10.1 to Form 10-K filed with the Securities and
Exchange Commission on April 2, 1993, and
incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc.
(Included as Exhibit 10.2 to Form 10-K filed with the
Securities and Exchange Commission on March 30, 1995,
and incorporated herein by reference.)
10.3 Assignment of Property Management Agreement from CNL
Income Fund Advisors, Inc. to CNL Fund Advisors, Inc.
(Included as Exhibit 10.3 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996
and incorporated herein by reference.)
27 Financial Data Schedule (Filed herewith.)
(b) The Registrant filed no reports on Form 8-K during the period from
October 1, 1999 through December 31, 1999.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 23rd day of
March, 2000.
CNL INCOME FUND II, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
-----------------------------
ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
-----------------------------
ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
-----------------------------
JAMES M. SENEFF, JR.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert A. Bourne President, Treasurer and Director March 23, 2000
- ------------------------------------
Robert A. Bourne (Principal Financial and Accounting
Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director March 23, 2000
- ------------------------------------
James M. Seneff, Jr. (Principal Executive Officer)
</TABLE>
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Additions Deductions
--------------------------------- -------------------------------
Collected
or Deter-
Balance at Charged to Charged to Deemed mined to Balance
Beginning Costs and Other Uncollec- be Col- at End
Year Description of Year Expenses Accounts tible lectible of Year
- ---------- ----------------- -------------- -------------- ---------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 Allowance for
doubtful
accounts (a) $ 126,036 $ -- $ 5,677 (b) $ 30,062 (c) $ 18,397 $ 83,254
============== ============== =============== ============= ============ ============
1998 Allowance for
doubtful
accounts (a) $ 83,254 $ -- $ 70 (b) $ 7,205 (c) $ 20,684 $ 55,435
============== ============== =============== ============= ============ ============
1999 Allowance for
doubtful
accounts (a) $ 55,435 $ -- $ 25,411 (b) $ -- $ 2,156 $ 78,690
============== ============== =============== ============= ============ ============
</TABLE>
(a) Deducted from receivables on the balance sheet.
(b) Reduction of rental and other income.
(c) Amounts written off as uncollectible.
F-1
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
-------------------------------------------------------
December 31, 1999
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent to Gross Amount at Which
Initial Cost Acquisition Carried at Close of Period (c)
----------------------- ------------------- -----------------------------------
Encum- Buildings and Improve- Carrying Buildings and
brances Land Improvements ments Costs Land Improvements Total
------- -------- ------------- --------- -------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Properties the Partnership
has Invested in:
Burger King Restaurant:
San Antonio, Texas - $373,095 $384,458 - - $373,095 $384,458 $ 757,553
Checkers Drive-In Restaurants:
Fayetteville, Georgia - 338,735 - - - 338,735 - 338,735
Atlanta, Georgia - 317,128 - - - 317,128 - 317,128
Denny's Restaurants:
Casper, Wyoming - 184,285 415,181 - - 184,285 415,181 599,466
Rock Springs, Wyoming - 217,448 488,991 - - 217,448 488,991 706,439
Golden Corral Family
Steakhouse Restaurants:
Tomball, Texas - 311,019 529,759 22,330 - 311,019 552,089 863,108
Pineville, Louisiana (e) - 187,961 503,435 - - 187,961 503,435 691,396
Hueytown, Alabama - 258,084 513,853 - - 258,084 513,853 771,937
Nederland, Texas - 327,473 520,701 - - 327,473 520,701 848,174
Jack in the Box Restaurant:
Lubbock, Texas - 229,198 408,702 - - 229,198 408,702 637,900
KFC Restaurants:
Jacksonville, Florida - 198,735 266,200 - - 198,735 266,200 464,935
Eagan, Minnesota - 202,084 370,247 31,976 - 202,084 402,223 604,307
Bay City, Texas - 162,783 - 305,154 - 162,783 305,154 467,937
Lonestar Steakhouse &
Saloon Restaurant:
Sterling Heights, Michigan (f) - 430,281 - 648,736 - 430,281 648,736 1,079,017
Pizza Hut Restaurants:
Clayton, New Mexico - 54,093 200,141 - - 54,093 200,141 254,234
Santa Rosa, New Mexico - 75,963 168,204 - - 75,963 168,204 244,167
Childress, Texas - 71,512 145,191 - - 71,512 145,191 216,703
Coleman, Texas - 70,208 141,004 - - 70,208 141,004 211,212
<CAPTION>
Life on Which
Depreciation in
Latest Income
Accumulated Date of Date Statement is
Depreciation Construction Acquired Computed
------------ ------------ -------- ---------------
<S> <C> <C> <C> <C>
Properties the Partnership
has Invested in:
Burger King Restaurant:
San Antonio, Texas $160,191 1987 07/87 (b)
Checkers Drive-In Restaurants:
Fayetteville, Georgia (d) - 12/94 (d)
Atlanta, Georgia (d) - 12/94 (d)
Denny's Restaurants:
Casper, Wyoming 170,686 1983 09/87 (b)
Rock Springs, Wyoming 201,029 1983 09/87 (b)
Golden Corral Family
Steakhouse Restaurants:
Tomball, Texas 231,891 1987 05/87 (b)
Pineville, Louisiana (e) 211,163 1987 06/87 (b)
Hueytown, Alabama 215,533 1987 06/87 (b)
Nederland, Texas 215,512 1987 08/87 (b)
Jack in the Box Restaurant:
Lubbock, Texas 87,638 1993 07/93 (b)
KFC Restaurants:
Jacksonville, Florida 109,438 1983 09/87 (b)
Eagan, Minnesota 164,241 1987 10/87 (b)
Bay City, Texas 122,909 1987 12/87 (b)
Lonestar Steakhouse &
Saloon Restaurant:
Sterling Heights, Michigan (f) 255,890 1988 08/87 (b)
Pizza Hut Restaurants:
Clayton, New Mexico 82,836 1986 08/87 (b)
Santa Rosa, New Mexico 69,618 1986 08/87 (b)
Childress, Texas 60,093 1974 08/87 (b)
Coleman, Texas 56,793 1977 12/87 (b)
</TABLE>
F-2
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
-------------------------------------------------------
December 31, 1999
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent to Gross Amount at Which
Initial Cost Acquisition Carried at Close of Period (c)
------------------------ ------------------- -------------------------------------
Encum- Buildings and Improve- Carrying Buildings and
brances Land Improvements ments Costs Land Improvements Total
---------- ---------- ------------- ---------- -------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ponderosa Steakhouse Restaurant:
Scottsburg, Indiana - 208,781 - 518,884 - 208,781 518,884 727,665
Popeyes Famous Fried
Chicken Restaurants:
Altamonte Springs, Florida - 197,959 255,965 - - 197,959 255,965 453,924
Ocala, Florida - 184,512 274,991 - - 184,512 274,991 459,503
Sanford, Florida - 237,243 359,865 - - 237,243 359,865 597,108
Apopka, Florida - 155,041 - 417,209 - 155,041 417,209 572,250
Wendy's Old Fashioned
Hamburger Restaurants:
Gainesville, Texas - 166,302 449,914 - - 166,302 449,914 616,216
Vail, Colorado - 782,609 - 550,346 - 782,609 550,346 1,332,955
Other:
Oxford, Alabama (g) - 152,567 355,990 - - 152,567 355,990 508,557
Lombard, Illinois (i) - 85,517 96,205 40,633 - 85,517 136,838 222,355
---------- ------------- ---------- -------- ---------- ------------- -----------
$6,180,616 $ 6,848,997 $2,535,268 - $6,180,616 $ 9,384,265 $15,564,881
========== ============= ========== ======== ========== ============= ===========
Property of Joint Venture in
Which the Partnership has
a 50% Interest and has Invested
in Under an Operating Lease:
Pizza Hut Restaurant:
Orlando, Florida - $ 330,568 $ 220,588 - - $ 330,568 $ 220,588 $ 551,156
========== ============= ========== ======== ========== ============= ===========
Property of Joint Venture in
Which the Partnership has
a 49% Interest and has Invested
in Under an Operating Lease:
Denny's Restaurant:
Holland, Michigan - $ 295,987 - $ 780,451 - $ 295,987 $ 780,451 $ 1,076,438
========== ============= ========== ======== ========== ============= ===========
<CAPTION>
Life on Which
Depreciation is
Latest Income
Accumulated Date of Date Statement is
Depreciation Construction Acquired Computed
------------ ------------ -------- ---------------
<S> <C> <C> <C> <C>
Ponderosa Steakhouse Restaurant:
Scottsburg, Indiana 204,671 1988 10/87 (b)
Popeyes Famous Fried
Chicken Restaurants:
Altamonte Springs, Florida 110,207 1987 02/87 (b)
Ocala, Florida 118,399 1987 02/87 (b)
Sanford, Florida 150,943 1987 06/87 (b)
Apopka, Florida 166,304 1988 09/87 (b)
Wendy's Old Fashioned
Hamburger Restaurants:
Gainesville, Texas 187,464 1986 07/87 (b)
Vail, Colorado 227,782 1987 08/87 (b)
Other:
Oxford, Alabama (g) 140,906 1987 02/88 (b)
Lombard, Illinois (i) 45,332 1973 10/87 (b)
------------
$ 3,767,469
============
Property of Joint Venture in
Which the Partnership has
a 50% Interest and has Invested
in Under an Operating Lease:
Pizza Hut Restaurant:
Orlando, Florida $ 89,768 1987 10/87 (b)
============
Property of Joint Venture in
Which the Partnership has
a 49% Interest and has Invested
in Under an Operating Lease:
Denny's Restaurant:
Holland, Michigan $ 290,501 1988 10/87 (b)
============
</TABLE>
F-3
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
-------------------------------------------------------
December 31, 1999
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent to Gross Amount at Which
Initial Cost Acquisition Carried at Close of Period (c)
----------------------- -------------------- -----------------------------------
Encum- Buildings and Impro- Carrying Buildings and
brances Land Improvements ments Costs Land Improvements Total
---------- -------- ------------- ---------- -------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property of Joint Venture in
Which the Partnership has
a 64% Interest and has Invested
in Under an Operating Lease:
Darryl's Restaurant:
Greensboro, North Carolina - $261,013 - - - $261,013 (k) $ 261,013
======== ============= ========== ======== ======== ==========
Property in Which the Partnership
has a 33.87% Interest as Tenants-
In-Common and has Invested
in Under an Operating Lease
Arby's Restaurant:
Arvada, Colorado (m) - $260,439 $ 545,126 - - $260,439 $ 545,126 $ 805,565
======== ============= ========== ======== ======== ============= ==========
Property in Which the Partnership
has a 57.91% Interest as Tenants-
in-Common and has Invested
in Under an Operating Lease:
Boston Market Restaurant:
Mesa, Arizona (l) - $440,843 $ 650,622 - - $440,843 $ 650,622 $1,091,465
======== ============= ========== ======== ======== ============= ==========
Property in Which the Partnership
has a 47% Interest as Tenants-
In Common and has Invested
in Under an Operating Lease:
Golden Corral Restaurant:
Smithfield, North Carolina - $264,272 $ 1,155,018 - - $264,272 $ 1,155,018 $1,419,290
======== ============= ========== ======== ======== ============= ==========
Property in Which the Partnership
has a 37.01% Interest as Tenants-
in Common and has Invested in
Under an Operating Lease:
Chevy's Fresh Mex Restaurant:
Vancouver, Washington - $875,659 $ 1,389,366 - - $875,659 $ 1,389,366 $2,265,025
======== ============= ========== ======== ======== ============= ==========
<CAPTION>
Life on Which
Depreciation in
Latest Income
Accumulated Date of Date Statement is
Depreciation Construction Acquired Computed
------------ ------------ -------- ---------------
<S> <C> <C> <C> <C>
Property of Joint Venture in
Which the Partnership has
a 64% Interest and has Invested
in Under an Operating Lease:
Darryl's Restaurant:
Greensboro, North Carolina - 1987 07/87 (j)
============
Property in Which the Partnership
has a 33.87% Interest as Tenants-
In-Common and has Invested
in Under an Operating Lease
Arby's Restaurant:
Arvada, Colorado (m) $ 95,883 1994 09/94 (b)
============
Property in Which the Partnership
has a 57.91% Interest as Tenants-
in-Common and has Invested
in Under an Operating Lease:
Boston Market Restaurant:
Mesa, Arizona (l) $ 47,524 1997 10/97 (b)
============
Property in Which the Partnership
has a 47% Interest as Tenants-
In Common and has Invested
in Under an Operating Lease:
Golden Corral Restaurant:
Smithfield, North Carolina $ 77,951 1996 12/97 (b)
============
Property in Which the Partnership
has a 37.01% Interest as Tenants-
in Common and has Invested in
Under an Operating Lease:
Chevy's Fresh Mex Restaurant:
Vancouver, Washington $ 92,749 1994 12/97 (b)
============
</TABLE>
F-4
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
-------------------------------------------------------
December 31, 1999
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent to Gross Amount at Which
Initial Cost Acquisition Carried at Close of Period (c)
----------------------- -------------------- -----------------------------------
Encum- Buildings and Impro- Carrying Buildings and
brances Land Improvements ments Costs Land Improvements Total
---------- -------- ------------- ---------- -------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property in Which the Partnership
has a 13.38% Interest as Tenants-
In-Common and has Invested
in Under an Operating Lease:
IHOP Restaurant Memphis,
Tennessee - $678,890 $ 825,076 - - $678,890 $ 825,076 $1,503,966
======== ============= ========== ======== ======== ============= ==========
Property of Joint Venture in Which
the Partnership has a 48%
Interest and has Invested in
Under an Operating Lease:
IHOP Restaurant:
Peoria, Arizona - $ 466,183 - - - $ 466,183 (k) $ 466,183
============= ========== ======== ======== ============= ==========
Property of Joint Venture in
Which the Partnership has a
64% Interest has Invested in
Under a Direct Financing Lease:
Darryl's Restaurant:
Greensboro, North Carolina - - - $521,400 - - (k) (k)
============= ========== ======== ======== =============
Property in Which the Partnership has
a 39.39% Interest as Tenants-
In-Common and has Invested
in Under a Direct Financing Lease:
IHOP Restaurant
Overland Park, Kansas - $ 335,374 $1,273,134 - - - (k) (k)
============= ========== ======== ======== =============
Property of Joint Venture in which
the Partnership has a 48%
Interest and has Invested in
Under a Direct Financing Lease:
IHOP Restaurant:
Peoria, Arizona - - $1,121,633 - - - (k) (k)
============= ========== ======== ======== =============
<CAPTION>
Life on Which
Depreciation in
Latest Income
Accumulated Date of Date Statement is
Depreciation Construction Acquired Computed
------------ ------------ -------- ---------------
<S> <C> <C> <C> <C>
Property in Which the Partnership
has a 13.38% Interest as Tenants-
In-Common and has Invested
in Under an Operating Lease:
IHOP Restaurant Memphis,
Tennessee $ 54,145 1997 01/98 (b)
============
Property of Joint Venture in Which
the Partnership has a 48%
Interest and has Invested in
Under an Operating Lease:
IHOP Restaurant:
Peoria, Arizona - 1998 11/99 (j)
============
Property of Joint Venture in
Which the Partnership has a
64% Interest has Invested in
Under a Direct Financing Lease:
Darryl's Restaurant:
Greensboro, North Carolina (j) 1974 06/97 (j)
Property in Which the Partnership has
a 39.39% Interest as Tenants-
In-Common and has Invested
in Under a Direct Financing Lease:
IHOP Restaurant
Overland Park, Kansas (j) 1997 01/98 (j)
Property of Joint Venture in which
the Partnership has a 48%
Interest and has Invested in
Under a Direct Financing Lease:
IHOP Restaurant:
Peoria, Arizona (j) 1998 11/99 (j)
</TABLE>
F-5
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
----------------------------------------------------------------
December 31, 1999
(a) Transactions in real estate and accumulated depreciation during 1999, 1998
and 1997, are summarized as follows:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
------------ ------------
<S> <C> <C>
Properties the Partnership has Invested in Under
Operating Leases:
Balance, December 31, 1996 $ 20,619,880 $ 3,816,091
Dispositions (4,153,217) (909,833)
Depreciation expense -- 395,837
------------ ------------
Balance, December 31, 1997 16,466,663 3,302,095
Depreciation expense -- 329,264
------------ ------------
Balance, December 31, 1998 16,466,663 3,631,359
Dispositions (901,782) (187,294)
Depreciation expense -- 323,404
------------ ------------
Balance, December 31, 1999 $ 15,564,881 $ 3,767,469
============ ============
Property of Joint Venture in Which the Partnership has
a 50% Interest and has Invested in Under an
Operating Lease:
Balance, December 31, 1996 $ 551,156 $ 67,709
Depreciation expense -- 7,353
------------ ------------
Balance, December 1997 551,156 75,062
Depreciation expense -- 7,353
------------ ------------
Balance, December 31, 1998 551,156 82,415
Depreciation expense -- 7,353
------------ ------------
Balance, December 31, 1999 $ 551,156 $ 89,768
============ ============
</TABLE>
F-6
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
---------------------------------------------------
DEPRECIATION - CONTINUED
------------------------
December 31, 1999
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
------------ ------------
<S> <C> <C>
Property of Joint Venture in Which the Partnership has a 49%
Interest and has Invested in Under an Operating Lease:
Balance, December 31, 1996 $ 1,076,438 $ 212,456
Depreciation expense -- 26,015
------------ ------------
Balance, December 31, 1997 1,076,438 238,471
Depreciation expense -- 26,015
------------ ------------
Balance, December 31, 1998 1,076,438 264,486
Depreciation expense -- 26,015
------------ ------------
Balance, December 31, 1999 $ 1,076,438 $ 290,501
============ ============
Property of Joint Venture in Which the Partnership has a 64%
Interest and has Invested in Under an Operating Lease:
Balance, December 31, 1996 $ 721,893 $ 168,765
Acquisition 261,013 --
Depreciation expense (d) -- 1,713
Disposition (721,893) (170,478)
------------ ------------
Balance, December 31, 1997 261,013 --
Depreciation expense -- --
------------ ------------
Balance, December 31, 1998 261,013 --
Depreciation expense -- --
------------- ------------
Balance, December 31, 1999 $ 261,013 $ --
============= ============
</TABLE>
F-7
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
---------------------------------------------------
DEPRECIATION - CONTINUED
------------------------
December 31, 1999
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
--------------- ----------------
<S> <C> <C>
Property in Which the Partnership has a 33.87% Interest as
Tenants-in-Common and has Invested in Under an Operating Lease:
Balance, December 31, 1996 $ 805,565 $ 41,370
Depreciation expense -- 18,171
--------------- ----------------
Balance, December 31, 1997 805,565 59,541
Depreciation expense -- 18,171
--------------- ----------------
Balance, December 31, 1998 805,565 77,712
Depreciation expense -- 18,171
--------------- ----------------
Balance, December 31, 1999 $ 805,565 $ 95,883
=============== ================
Property in Which the Partnership has a 57.91% Interest as
Tenants-in-Common and had Invested in Under an Operating Lease:
Balance, December 31, 1996 $ -- $ --
Acquisitions 1,091,465 --
Depreciation expense -- 4,021
--------------- ----------------
Balance, December 31, 1997 1,091,465 4,021
Depreciation expense -- 21,815
--------------- ----------------
Balance, December 31, 1998 1,091,465 25,836
Depreciation expense -- 21,688
--------------- ----------------
Balance, December 31, 1999 $ 1,091,465 $ 47,524
=============== ================
</TABLE>
F-8
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
---------------------------------------------------
DEPRECIATION - CONTINUED
------------------------
December 31, 1999
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
--------------- ---------------
<S> <C> <C>
Property in Which the Partnership has 47% Interest as
Tenants-in-Common and had Invested in Under an Operating Lease:
Balance, December 31, 1996 $ -- $ --
Acquisitions 1,419,290 --
Depreciation expense -- 949
--------------- ---------------
Balance, December 31, 1997 1,419,290 949
Depreciation expense -- 38,501
--------------- ---------------
Balance, December 31, 1998 1,419,290 39,450
Depreciation expense -- 38,501
--------------- ---------------
Balance, December 31, 1999 $ 1,419,290 $ 77,951
=============== ===============
Property in Which the Partnership has a 37.01% Interest as
Tenants-in-Common and had Invested in Under an Operating Lease:
Balance, December 31, 1996 $ -- $ --
Acquisitions 2,265,025 --
Depreciation expense -- 127
--------------- ---------------
Balance, December 31, 1997 2,265,025 127
Depreciation expense -- 46,310
--------------- ---------------
Balance, December 31, 1998 2,265,025 46,437
Depreciation expense -- 46,312
--------------- ---------------
Balance, December 31, 1999 $ 2,265,025 $ 92,749
=============== ===============
Property in Which the Partnership has a 13.38% Interest as
Tenants-in-Common and had Invested in Under an Operating Lease:
Balance, December 31, 1997 $ -- $ --
Acquisitions 1,503,966 --
Depreciation expense -- 26,642
--------------- ---------------
Balance, December 31, 1998 1,503,966 26,642
Depreciation expense -- 27,503
--------------- ---------------
Balance, December 31, 1999 $ 1,503,966 $ 54,145
=============== ===============
</TABLE>
F-9
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
---------------------------------------------------
DEPRECIATION - CONTINUED
------------------------
December 31, 1999
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
-------------- ---------------
<S> <C> <C>
Property of Joint Venture in Which the Partnership has a 48%
Interest and has Invested in Under a Operating Lease:
Balance, December 31, 1998 $ -- $ --
Acquisitions 466,183 --
Depreciation expense (j) -- --
------------- --------------
Balance, December 31, 1999 $ 466,183 $ --
============= ==============
</TABLE>
(b) Depreciation expense is computed for buildings and improvements based upon
estimated lives of 30 years.
(c) As of December 31, 1999, the aggregate cost of the Properties owned by the
Partnership and the joint ventures (including the Properties held as
tenants-in-common) for federal income tax purposes was $15,518,477 and
$12,468,506, respectively. All of the leases are treated as operating
leases for federal income tax purposes.
(d) The building portion of this Property is owned by the tenant; therefore,
depreciation is not applicable.
(e) The tenant of this Property, Golden Corral Corporation, has subleased this
Property to a local, independent restaurant. Golden Corral Corporation
continues to be responsible for complying with all the terms of the lease
agreement and is continuing to pay rent on this Property to the
Partnership.
(f) The restaurant in Sterling Heights, Michigan, was converted from a
Ponderosa Steakhouse Restaurant to a Lonestar Steakhouse & Saloon
Restaurant in 1994.
g) The restaurant in Oxford, Alabama, was converted from a KFC Restaurant to a
regional, independent restaurant in 1993.
(h) The restaurant in Littleton, Colorado, was converted from a Taco Bell
restaurant to a local, independent restaurant in 1995.
(i) The restaurant in Lombard, Illinois, was converted from a Taco Bell
restaurant to a Great Clips hair salon in 1996.
(j) For financial reporting purposes, the portion of the lease relating to the
building has been included in net investment in direct financing leases;
therefore, depreciation is not applicable.
(k) For financial reporting purposes, certain components of the lease relating
to the land and building have been recorded as a direct financing lease.
Accordingly, costs relating to these components of this lease are not
shown.
F-10
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
---------------------------------------------------
DEPRECIATION - CONTINUED
------------------------
December 31, 1999
(l) During the year ended December 31, 1997, the Partnership and an affiliate
as tenants-in-common, purchased land and building from CNL BB Corp., an
affiliate of the General Partners, for an aggregate cost of $1,091,465.
(m) The Property was converted from a Kenny Rogers Roasters restaurant to an
Arby's Restaurant during 1996.
F-11
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
-------------------------------------------
December 31, 1999
<TABLE>
<CAPTION>
Principal
Amount
of Loans
Subject to
Carrying Delinquent
Final Periodic Face Amount of Principal or
Interest Maturity Payment Prior Amount of Mortgages Description
Rate Date Terms Liens Mortgages (1) Interest
---------- ----------------- ----------- ----------- -------------- ------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
KFC
Eagan, MN
First Mortgage 10.50% December 1998 (1) $ -- $ 42,000 $ 6,872 $ --
=========== ============== ============= ============
</TABLE>
(1) Monthly payments of interest only at an annual rate of 10.50%. Beginning
July 1, 1998, monthly payments of principal and interest at an annual rate
of 10.50%.
(2) The tax carrying value of the notes is approximately $6,817.
(3) The changes in the carrying amounts are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ---------------- ---------------
<S> <C> <C> <C>
Balance at beginning of period $ 6,872 $ 42,734 $ --
New mortgage loans -- -- 42,000
Interest earned -- 3,113 2,572
Collection of principal and interest (6,872) (38,975) (1,838)
-------------- ---------------- ---------------
Balance at end of period $ -- $ 6,872 $ 42,734
============== ================ ===============
</TABLE>
F-12
<PAGE>
EXHIBIT INDEX
Exhibit Number
--------------
3.1 Certificate of Limited Partnership of CNL Income Fund II, Ltd.
(Included as Exhibit 3.1 to Amendment No. 1 to Registration
Statement No. 33-10351 on Form S-11 and incorporated herein by
reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as Exhibit
3.2 to Form 10-K filed with the Securities and Exchange
Commission on April 2, 1993, and incorporated herein by
reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund II, Ltd.
(Included as Exhibit 4.1 to Amendment No. 1 to Registration
Statement No. 33-10351 on Form S-11 and incorporated herein by
reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund II, Ltd. (Included as Exhibit
3.2 to Form 10-K filed with the Securities and Exchange
Commission on April 2, 1993, and incorporated herein by
reference.)
10.1 Property Management Agreement (Included as Exhibit 10.1 to
Form 10-K filed with the Securities and Exchange Commission on
April 2, 1993, and incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc. (Included
as Exhibit 10.2 to Form 10-K filed with the Securities and
Exchange Commission on March 30, 1995, and incorporated herein
by reference.)
10.3 Assignment of Property Management Agreement from CNL Income
Fund Advisors, Inc. to CNL Fund Advisors, Inc. (Included as
Exhibit 10.3 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996 and incorporated herein
by reference.)
27 Financial Data Schedule (Filed herewith.)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund II, Ltd. at December 31, 1999, and its statement of
income for the twelve months then ended and is qualified in its entirety by
reference to the Form 10-K of CNL Income Fund II, Ltd. for the twelve months
ended December 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 904,715
<SECURITIES> 0
<RECEIVABLES> 112,539
<ALLOWANCES> 78,690
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 15,564,881
<DEPRECIATION> 3,767,469
<TOTAL-ASSETS> 18,026,218
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,277,743
<TOTAL-LIABILITY-AND-EQUITY> 18,026,218
<SALES> 0
<TOTAL-REVENUES> 1,804,174
<CGS> 0
<TOTAL-COSTS> 658,178
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,699,378
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,699,378
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,699,378
<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.
</FN>
</TABLE>
