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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-16824
CNL INCOME FUND II, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2733859
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801 (Address of principal executive
offices, including zip code)
Registrant's telephone number, including area code: (407) 540-2000
Securities registered pursuant to Section12 (b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section12(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. No [ X ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2): Yes___ No_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 value for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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, totaled
$22,300,178, and were used to acquire, either directly or indirectly through
joint venture arrangements, 39 Properties.
As of December 31, 2000, the Partnership owned 33 Properties, either
directly or indirectly through joint venture or tenancy in common arrangements.
During the year ended December 31, 2001, the Partnership sold its Property in
Bay City, Texas, and Peoria Joint Venture, in which the Partnership owned a 48%
interest, sold its Property to a third party. The Partnership received a
liquidating distribution from the net sales proceeds. The Partnership
distributed the majority of the liquidating distribution to the Limited Partners
as a special distribution. During 2002, the Partnership sold its Properties in
Rock Springs, Wyoming; Pineville, Louisiana; and San Antonio, and Tomball,
Texas. In addition during 2002, the building related to the Property in Casper,
Wyoming was partially destroyed by fire, and the Partnership received insurance
proceeds. Subsequently, the Partnership demolished the building and sold the
land. The majority of the insurance and net sales proceed from these Properties
were distributed to the Limited Partners as a special distribution, and the
remaining proceeds were used to pay liabilities of the Partnership. During 2003,
Show Low Joint Venture, in which the Partnership owned a 64% interest, sold its
Property and the Partnership and, the joint venture partner liquidated the joint
venture. As of December 31, 2003 the Partnership owned 25 Properties. The 25
Properties include interests in two 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 holds 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 consider factors such as potential capital
appreciation, net cash flow and federal income taxes. 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.
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 5 to 20 years (the average being 16 years), and expire
between 2004 and 2021. 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 $18,700 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 15 of the Partnership's 25 Properties also have been
granted options to purchase Properties at the Property's then fair market value
after a specified portion of the lease term has elapsed. Fair market value will
be determined through an appraisal by an independent appraisal firm. Under the
terms of certain leases, the option purchase price may equal the Partnership's
original cost to purchase the Property (including acquisition costs), plus a
specified percentage from the date of the lease or a specified percentage of the
Partnership's purchase price, if that amount is greater than the Property's fair
market value at the time the purchase option is 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 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.
In January 2002, Houlihan's Restaurant, Inc., the tenant of the
Property owned by Show Low Joint Venture, filed for bankruptcy and rejected the
lease relating to the Property in Greensboro, North Carolina. In September 2003,
the joint venture sold this Property. In December 2003, the Partnership and the
joint venture partner liquidated the joint venture and the Partnership received
its pro rata share of the liquidating distribution in December 2003.
During August 2002, the lease relating to the Golden Corral Property in
Nederland, Texas expired; a new contract was signed with the Partnership through
December 2002. The tenant continued to operate under a month-to-month lease
until December 2003. During January 2004, the tenant abandoned the property. The
lost revenues will have an adverse effect on the results of operations of the
Partnership if the Partnership is unable to lease the Properties in a timely
manner.
In October 2003, Chevy's, Inc., the tenant of the Property in
Vancouver, Washington, which the Partnership owns as tenants-in-common with
affiliates of the General Partners, filed for Chapter 11 bankruptcy protection.
The Partnership owns a 37.01% interest in this Property. While the tenant has
neither rejected nor affirmed the one lease it has with the Partnership, there
can be no assurance that the lease will not be rejected in the future. The lost
revenues that would result if the tenant rejects this lease will have an adverse
effect on the equity in earnings of joint ventures of the Partnership if the
tenancy in common is not able to re-lease the Property in a timely manner.
Major Tenants
During 2003, none of the Partnership's lessees contributed more than
ten percent of rental revenues (including the Partnership's share of rental
revenues from Properties owned by joint ventures and Properties owned with
affiliates of the General Partners as tenants-in-common). In addition during
2003, two Restaurant Chains, Pizza Hut and Wendy's, each accounted for more than
ten percent of rental revenues (including the Partnership's share of the rental
revenues from Properties owned by joint ventures and Properties owned with
affiliates of the General Partners as tenants-in-common). In 2004, it is
anticipated that these two Restaurant Chains each will continue to account for
more than 10% of the rental revenues to which the Partnership is entitled under
the terms of its leases. A failure of these Restaurant Chains will materially
affect the Partnership's revenues if the Partnership is not able to re-lease the
Properties in a timely manner. As of December 31, 2003, no single tenant or
group of affiliated tenants leased Properties with an aggregate carrying value
in excess of 20% of the total assets of the Partnership.
Joint Venture and Tenancy in Common Arrangements
The partnership has entered into the following joint venture and
tenancy in common arrangements as of December 31, 2003:
Entity Name Year Ownership Partners Property
Kirkman Road Joint Venture 1987 50.00% Various third party partners Orlando, FL
Holland Joint Venture 1988 49.00 % CNL Income Fund IV, Ltd. Holland, MI
CNL Income Fund II, Ltd. and 1994 33.87% CNL Income Fund XIII, Ltd. Arvada, CO
CNL Income Fund XIII,
Ltd. Tenants in Common
CNL Income Fund II, Ltd. and 1997 57.91% CNL Income Fund V, Ltd. Mesa, AZ
CNL Income Fund V, Ltd.
Tenants in Common
CNL Income Fund II, Ltd., and 1997 47.00% CNL Income Fund VII, Ltd. Smithfield, NC
CNL Income Fund VII,
Ltd. Tenants in Common
CNL Income Fund, Ltd., CNL 1997 37.01% CNL Income Fund, Ltd. Vancouver, WA
Income Fund II, Ltd., CNL Income Fund V, Ltd.
CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd.
and CNL Income Fund VI,
Ltd. Tenants in Common
CNL Income Fund II, Ltd., CNL 1998 39.39% CNL Income Fund III, Ltd. Overland Park, KS
Income Fund III, Ltd and CNL Income Fund VI, Ltd.
CNL Income Fund VI, Ltd.
Tenants in Common
CNL Income Fund II, Ltd., CNL 1998 13.38% CNL Income Fund VI, Ltd. Memphis, TN
Income Fund VI, Ltd. and CNL Income Fund XVI, Ltd.
CNL Income Fund XVI,
Ltd. Tenants in Common
Each joint venture or tenancy in common was formed to hold one
Property. Each CNL Income Fund is an affiliate of the General Partners and is a
limited partnership organized pursuant to the laws of the state of Florida. The
Partnership has management control of Kirkman Road Joint Venture, and shares
management control equally with the affiliates of the General Partners for the
other joint ventures.
The joint venture and tenancy in common arrangements provide for the
Partnership and its joint venture and tenancy in common partners to share in all
costs and benefits in proportion to each partner's percentage interest in the
Property or entity. The Partnership and its partners are also jointly and
severally liable for all debts, obligations and other liabilities of the joint
venture or tenancy in common. Net cash flow from operations is distributed to
each joint venture or tenancy in common partner in accordance with its
respective percentage interest in the Property or entity.
Each joint venture has an initial term of 20 years and, after the
expiration of the initial term, continues in existence from year to year unless
terminated at the option of either joint venturer 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 partners to dissolve 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.
The joint venture and tenancy in common agreements restrict each
party's ability to sell, transfer or assign its interest without first offering
it for sale to its partners, either upon such terms and conditions as to which
the parties may agree or, in the event the parties cannot agree, on the same
terms and conditions as any offer from a third party to purchase such joint
venture or tenancy in common interest.
The Partnership had entered into a joint venture arrangement, Show Low
Joint Venture, with an affiliate of the General Partners, to purchase and hold a
Property. During 2003, Show Low Joint Venture was liquidated upon the sale of
the Property held by the joint venture and the net sales proceeds were
distributed to each joint venture partner in accordance with the terms of the
joint venture agreement.
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
RAI Restaurants, Inc. ("the Advisor"), an affiliate of the General
Partners, provides certain services relating to the management of the
Partnership and its Properties pursuant to a management agreement with the
Partnership. Under this agreement, the Advisor 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. The Advisor also assists the General Partners in negotiating the
leases. For these services, the Partnership has agreed to pay the Advisor 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, cumulative, 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.
During 2003, CNL Capital Management, Inc., ("CCM"), a wholly owned
subsidiary of CNL Financial Group, Inc., began providing certain strategic
advisory services to the General Partners relative to the Partnership's
business. CCM is not reimbursed for these services by the Partnership. CCM also
began providing some accounting and portfolio management services to the
Partnership during 2003, through a subcontract with the Advisor.
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.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation, the officers and employees of CNL Restaurant Properties, Inc.
(formerly CNL American Properties Fund, Inc.), the parent company of the
Advisor, and the officers and employees of CCM 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., a diversified real estate company, and its affiliates, who may also
perform certain services for the Partnership.
Item 2. Properties
As of December 31, 2003, the Partnership owned 25 Properties. Of the 25
Properties, 17 are owned by the Partnership in fee simple, two 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.
Description of Properties
Land. The Partnership's Property sites, owned directly and indirectly,
range from approximately 11,500 to 86,000 square feet depending upon building
size and local demographic factors. Sites purchased by the Partnership are in
locations zoned for commercial use which have been reviewed for traffic patterns
and volume.
The following table lists the Properties owned by the Partnership,
directly and indirectly, as of December 31, 2003 by state.
State Number of Properties
Alabama 2
Arizona 1
Colorado 2
Florida 2
Georgia 2
Illinois 1
Indiana 1
Kansas 1
Michigan 2
Minnesota 1
New Mexico 2
North Carolina 1
Tennessee 1
Texas 5
Washington 1
--------------
TOTAL PROPERTIES: 25
==============
Buildings. Each of the Properties 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, 2003, 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, 2003, 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 $9,378,528 and
$10,326,413, respectively.
The following table lists the Properties owned by the Partnership,
directly and indirectly, as of December 31, 2003, by Restaurant Chain.
Restaurant Chain Number of Properties
Arby's 1
Checkers 2
Chevy's Fresh Mex 1
Del Taco 1
Denny's 1
Golden Corral 2
IHOP 2
Jack in the Box 1
KFC 1
Pizza Hut 5
Ponderosa 1
Popeyes 1
Wendy's 2
Other 4
--------------
TOTAL PROPERTIES 25
==============
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 substantially all the Properties to operators of
Restaurant Chains. The Properties are leased generally on a long-term "triple
net" basis, meaning that the tenant is responsible for repairs, maintenance,
property taxes, utilities, and insurance.
The following is a schedule of the average rent per property and
occupancy rate for the years ended December 31:
2003 2002 2001 2000 1999
------------- ------------- -------------- ------------- --------------
Rental Revenues (1)(2) $1,511,926 $ 1,532,701 $ 1,781,716 $ 2,142,668 $2,255,787
Properties (2) 25 25 29 32 37
Average Rent Per Property
$60,477 $ 61,308 $ 61,438 $ 66,958 $ 60,967
Occupancy Rate 100% 96% 94% 97% 100%
(1) Rental revenues include the Partnership's share of rental revenues from
the Properties owned through joint venture and tenancy in common
arrangements.
(2) Excludes Properties that were vacant at December 31, and did not generate
rental revenues during the year ended December 31.
The following is a schedule of lease expirations for leases in place as
of December 31, 2003, for each of the next ten years and thereafter.
Percentage of
Expiration Year Number of Annual Rental Gross Annual
Leases Revenues Rental Income
-------------------- -------------- ------------------- --------------------
2004 1 $ 96,600 7.24%
2005 2 65,502 4.91%
2006 1 63,193 4.73%
2007 8 445,083 33.34%
2008 1 16,530 1.24%
2009 -- -- --
2010 -- -- --
2011 2 146,419 10.97%
2012 2 162,744 12.19%
2013 1 58,921 4.41%
Thereafter 6 279,887 20.97%
-------------- ------------------- --------------------
Totals (1) 24 $ 1,334,879 100.00%
============== =================== ====================
(1) Excludes the Property in Nederland, Texas for which the lease expired and
the tenant continued to operate under a month-to-month lease until the
tenant vacated the property in January 2004.
Leases with Major Tenant
The terms of the leases with the Partnership's major tenants as of
December 31, 2002 (see Item 1. Business - Major Tenants), are substantially the
same as those described in Item 1. Business - Leases.
During 2003, none of the Partnership's lessees contributed more than
ten percent of the Partnership's rental revenues (including the Partnership's
share of rental revenues from Properties owned by joint ventures and Properties
owned with affiliates of the General Partners as tenants-in-common).
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners or any affiliate of
the General Partners, nor any of their respective Properties, is party to, or
subject to, any material pending legal proceedings.
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 12, 2004, there were 2,159 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 2003, 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 have the right to prohibit transfers of Units. From
inception through June 30, 2000, the price paid for any Unit transferred
pursuant to the Plan ranged from $436 to $475 per Unit. From July 2000 through
December 2003, due primarily to the continued sales of Properties, the price
paid for any Unit transferred pursuant to the Plan ranged from $357 to $425 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 2003 and 2002 other than
pursuant to the Plan, net of commissions.
2003 (1) 2002 (1)
----------------------------------- ------------------------------------
High Low Average High Low Average
--------- -------- ---------- ---------- --------- ----------
First Quarter $ 336 $ 220 $285 $ 280 $198 $ 227
Second Quarter 315 208 260 275 215 249
Third Quarter 357 237 307 252 215 225
Fourth Quarter 217 160 188 300 276 290
(1) A total of 277 and 582 Units were transferred other than pursuant to
the Plan for the years ended December 31, 2003 and 2002, respectively.
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.
During the years ended December 31, 2003 and 2002, the Partnership
declared distributions to the limited partners of $1,462,520 and $3,124,909,
respectively. Distributions for the year ended December 31, 2003 and 2002,
included $125,000 and $1,600,000, respectively, in special distributions, as a
result of the distributions of net sales proceeds from the sales of several
properties, and for 2002, distributions of insurance proceeds on casualty loss.
These special distributions were effectively a return of a portion of the
limited partners' investment, although, in accordance with the Partnership
agreement, $125,000 and $866,124, respectively, were applied toward the limited
partners' 10% Preferred Return and the balances of $0 and $733,876 were treated
as a return of capital for purposes of calculating the limited partners' 10%
Preferred Return. As a result of the return of capital, the amount of the
limited partners' invested capital contributions (which generally is the limited
partners' capital contributions, less distributions from the sale of a property
that are considered to be a return of capital) decreased; therefore, the amount
of the limited partners' capital on which the 10% Preferred Return is calculated
was lowered accordingly. As a result of the sale of the properties in 2003 and
2002, the Partnership's total revenue has decreased, while the majority of the
Partnership's operating expenses remained fixed. Therefore, distributions of net
cash flow have been adjusted in the quarters ended September 30, 2002 and
December 31, 2002, and the quarter ended December 31, 2003, and are expected to
remain reduced in subsequent years. 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 2003 2002
------------------------- --------------- ----------------
March 31 $ 334,380 $ 423,496
June 30 334,380 1,123,496
September 30 334,380 743,537
December 31 459,380 834,380
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
2003 2002 2001 2000 1999
------------- -------------- ------------- ------------ ------------
Year ended December 31:
Continuing Operations (3):
Revenues $ 1,073,585 $ 1,141,803 $ 1,245,141 $1,397,091 $1,489,651
Equity in earnings of
unconsolidated joint venture 303,140 253,111 441,969 443,567 440,215
Income from continuing
operations (1) 979,190 1,095,542 1,442,574 2,099,613 1,474,822
Discontinued Operations (3):
Revenues -- 83,134 177,623 268,444 314,523
Income (loss) from and loss on
disposal of discontinued
operations (2) -- (417,496 ) (188,828 ) 175,956 224,556
Net income 979,190 678,046 1,253,746 2,275,569 1,699,378
Income (loss) per Unit:
Continuing operations $ 19.58 $ 21.91 $ 28.85 $ 41.99 $ 29.50
Discontinued operations -- (8.35 ) (3.78 ) 3.52 4.49
------------- -------------- ------------- ------------ ------------
Total $ 19.58 $ 13.56 $ 25.07 $ 45.51 $ 33.99
============= ============== ============= ============ ============
Cash distributions declared (4) $ 1,462,520 $ 3,124,909 $ 2,913,6500 $4,397,916 $2,062,516
Cash distributions declared per
unit (4) 29.25 62.50 58.27 87.96 41.25
At December 31:
Total assets $ 11,400,102 $ 12,242,594 $14,193,243 $15,833,995 $18,026,218
Partners' capital 10,565,299 11,048,629 13,495,492 15,155,396 17,277,743
(1) Income from continuing operations for the years ended December 31,
2002, 2001, 2000 and 1999, includes $133,603, $204,179, $766,913 and
$192,752, respectively, from gain on sale of assets. In addition,
income from continuing operations for the year ended December 31, 1999,
includes $79,585 from a loss on sale of assets. Income from continuing
operations for the years ended December 31, 2002, 2001, and 2000, has
been reduced by real estate disposition fees of $22,500, $16,620, and
$71,056, as a result of the sales of several Properties. Income from
continuing operations for the year ended December 31, 2001, also
includes lease termination income of $13,112.
(2) Income (loss) from and loss on disposal of discontinued operations for
the year ended December 31, 2002 includes provisions for write-down of
assets of $498,312 partially offset by insurance proceeds of $88,777,
which the Partnership recorded as an adjustment to the loss incurred in
a Property destroyed by fire. The year ended December 31, 2002 also
includes losses on disposal of discontinued operations of $25,967. 2001
includes provisions for write-down of assets of $223,550. The year
ended December 31, 2002 includes real estate disposition fees of
$32,829 as a result of the sales of several Properties.
(3) Certain items in the prior years financial data have been reclassified
to conform to the 2003 presentation. These reclassifications had no
effect on net income. The results of operations relating to properties
that were either identified for sale and disposal of subsequent to
January 1, 2002 or were classified as held for sale as of December 31,
2003 are reported as discontinued operations for all periods presented.
The results of operations relating to properties that were identified
for sale as of December 31, 2001 but sold subsequently are reported as
continuing operations.
(4) Distributions for the years ended December 31, 2003, 2002, 2001, and
2000 include special distributions to the Limited Partners of $125,000,
$1,600,000, $1,200,000, and $2,500,000, respectively, as a result of
the distributions of the net sales proceeds from the sales of several
Properties and insurance proceeds received in 2002.
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 Restaurant Chains. The leases are, in general, triple-net leases,
with the lessees responsible for all repairs and maintenance, property taxes,
insurance and utilities. The leases provide for minimum base annual rental
amounts (payable in monthly installments) ranging from approximately $18,700 to
$222,800. The majority of the leases provide for percentage rent, based on sales
in excess of a specified amount. In addition, some of the leases provide that,
commencing in specified lease years (generally the sixth lease year), the annual
base rent required under the terms of the lease will increase.
The Partnership owned 17, 17, and 22, Properties directly as of
December 31, 2003, 2002 and 2001, respectively. In addition, the Partnership
owned eight, nine, and nine Properties indirectly through joint venture or
tenancy in common arrangements, as of December 31, 2003, 2002 and 2001,
respectively.
Capital Resources
For the years ended December 31, 2003, 2002, and 2001, cash from
operating activities was $1,285,713, $1,334,027 and $1,671,766, respectively.
The decrease in cash from operating activities during both 2003 and 2002, as
compared to the same period in the previous year resulted from changes in the
Partnership's income and expenses.
Other sources and uses of cash included the following during the years
ended December 31, 2003, 2002, and 2001.
During 2003, 2002, and 2001, the Partnership distributed to the Limited
Partners the majority of the insurance proceeds from a 2001 loss due to fire,
liquidating proceeds from a 2003 and 2001 dissolution of joint ventures, and net
sales proceeds from sales of Properties in 2002 and 2001, except as indicated.
These transactions are described below.
In August 2001, Peoria Joint Venture, in which the Partnership owned a
48% interest, sold its Property to a third party for approximately $1,786,900
resulting in a gain of approximately $136,700. The Partnership received
approximately $830,300 as a return of capital representing its share of the
liquidation proceeds of the joint venture. In September 2001, Peoria Joint
Venture was dissolved in accordance with the joint venture agreement. No gain or
loss on the dissolution of the joint venture was incurred.
In September 2001, the Partnership sold its Property in Bay City,
Texas, to the tenant and received net sales proceeds of approximately $548,900,
resulting in a gain of $204,179.
In October 2001, the Property in Casper, Wyoming was partially
destroyed by fire. As a result during 2002, the Partnership collected
approximately $227,600 in insurance proceeds and demolished the building. In
June 2002, in connection with the anticipated sale of the land, the Partnership
recorded a provision for write-down of assets of $63,714. The provision
represented the difference between the carrying value of the property and its
estimated fair value. In August 2002, the Partnership sold the land to an
unrelated party and received net sales proceeds of approximately $113,700,
resulting in a loss on disposal of assets of approximately $10,600.
During 2001, the Partnership recorded a provision for write-down of
assets in the amount of $145,535 relating to the Denny's property in Rock
Springs, Wyoming because in October, 2001, Phoenix Restaurant Group, Inc. and
its Subsidiaries (collectively referred to as "PRG"), a tenant of the
Partnership, filed for Chapter 11 bankruptcy protection and rejected the lease
related to this Property. The provision represented the difference between the
carrying value of the property at December 31, 2001 and its estimated fair
value. In addition in June 2002, in connection with the anticipated sale of this
property, the Partnership recorded a provision for write-down of assets of
approximately $113,600. The provision represented the difference between the
carrying value of the property and its estimated fair value. In August 2002, the
Partnership sold the property to a third party and received net sales proceeds
of approximately $204,700, resulting in a loss on disposal of assets of
approximately $15,300.
In June 2002, the Partnership sold its Burger King Property in San
Antonio, Texas to the tenant and received net sales proceeds of approximately
$747,500, resulting in a gain of approximately $133,600.
In June 2002, the Partnership recorded a provision for write-down of
assets of $181,231 relating to the Property in Pineville, Louisiana since the
tenant opted to not renew its lease, which expired in June 2002, and vacated the
Property. The provision represented the difference between the carrying value of
the Property and its estimated fair value. In December 2002, the Partnership
sold this Property and received net sales proceeds of approximately $262,400.
Since the Partnership had recorded a provision for write-down for this Property,
no additional gain or loss was recognized on the sale. In September 2002, the
Partnership recorded a provision for write-down of assets of $139,752 relating
to the Property in Tomball, Texas in anticipation of the sale of this Property.
The provision represented the difference between the carrying value of the
Property and its estimated fair value. This Property was vacant since the tenant
opted to not renew its lease, which expired in May 2002. In October 2002, the
Partnership sold the Property to an unrelated third party and received net sales
proceeds of approximately $458,200. Since the Partnership had recorded a
provision for write-down for this Property, no additional gain or loss was
recognized on the sale. The Partnership distributed to the Limited Partners a
portion of the net proceeds from the sales of these two Properties, and used the
remaining proceeds to pay liabilities of the Partnership.
During 2003, Show Low Joint Venture, in which the Partnership owned a
64% interest, sold its Property in Greensboro, North Carolina to a third party
and received net sales proceeds of approximately $468,900, resulting in a loss
to the joint venture of approximately $29,500. The joint venture had recorded
provisions for write-down of assets relating to this Property in previous
periods. In the fourth quarter of 2003, the Partnership received approximately
$278,900 as its pro-rata share of the liquidating distribution from the joint
venture. The Partnership intends to use a portion of these proceeds to make a
special distribution to the limited partners and to use the remaining proceeds
to pay liabilities of the Partnership.
In October 2003, Chevy's, Inc., the tenant of the Property in
Vancouver, Washington which the Partnership owns as tenants-in-common with
affiliates of the general partners, filed for Chapter 11 bankruptcy protection.
The Partnership owns a 37.01% in this Property. As of March 12, 2004, Chevy's,
Inc. had neither rejected nor affirmed the lease related to this Property. The
lost revenues that would result, if the lease were rejected, will have an
adverse effect on the equity in earnings of unconsolidated joint ventures of the
Partnership if the tenancy in common is not able to re-lease or sell the
Property in a timely manner.
During the year ended December 31, 2003, the Partnership incurred no
deferred, subordinated, real estate disposition fees. In connection with the
sales of the properties in 2002 and 2001, the Partnership incurred deferred,
subordinated, real estate disposition fees of $55,329 and $16,620, respectively.
Payment of the real estate disposition fees is subordinated to receipt by the
Limited Partners of their aggregate, cumulative 10% Preferred Return, plus their
adjusted capital contributions.
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, at 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.
At December 31, 2003, the Partnership had $922,370 invested in cash and
cash equivalents, as compared to $1,193,910 at December 31, 2002. At December
31, 2003, these funds were held in a demand deposit accounts at a commercial
bank. The decrease in cash and cash equivalents was primarily a result of the
Partnership distributing to the Limited Partners, in the form of a special
distribution as described below, sales proceeds that were held at December 31,
2002. As of December 31, 2003, the average interest rate earned on rental income
held in the demand deposit account at the commercial bank was less than one
percent annually. The funds remaining at December 31, 2003, after the payment of
distributions and other liabilities, will be used to meet the Partnership's
working capital needs.
Short-Term Liquidity
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 net cash
flow in excess of operating expenses.
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
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.
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.
In July 2001, the Partnership entered into a promissory note with the
corporate General Partner for a loan in the amount of $75,000 in connection with
the operations of the Partnership. The loan was uncollateralized, non-interest
bearing and due on demand. In August 2001, the Partnership had repaid the entire
loan to the corporate general partner.
The Partnership generally distributes cash from operating activities
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, the insurance proceeds received in 2002, and the majority of the net
sales proceeds received from the sales of Properties during 2003, 2002, and
2001, the Partnership declared distributions to the Limited Partners of
$1,462,520, $3,124,909, and $2,913,650, for years ended December 31, 2003, 2002,
and 2001, respectively. This represents distributions of $29.25, $62.50, and
$58.27, per Unit for the years ending in December 31, 2003, 2002, and 2001,
respectively. Distributions for the year ended December 31, 2003, 2002, and
2001, included $125,000, $1,600,000, and $1,200,000 in special distributions, as
a result of the distributions of the majority of the net sales proceeds from the
sales of several Properties and distribution of insurance proceeds received in
2002. These special distributions were effectively a return of a portion of the
Limited Partners' investment, although, in accordance with the Partnership
agreement, $125,000, $866,124, and $657,471 were applied toward the Limited
Partners' 10% Preferred Return and the balances of $0, $733,876, and $542,529
were treated as a return of capital for purposes of calculating the Limited
Partners' 10% Preferred Return. As a result of the return of capital, the amount
of the Limited Partners' invested capital decreased; therefore, the amount of
the limited partners' invested capital contributions on which the 10% Preferred
Return is calculated was lowered accordingly. As a result of the sales of the
Properties in 2002 and 2001, the Partnership's total revenue has decreased,
while the majority of the Partnership's operating expenses remained somewhat
fixed. Therefore, distributions of net cash flow have been adjusted in the
quarter ended September 30, 2000, with subsequent adjustments in the quarter
ended December 31, 2002. No distributions were made to the General Partners for
the years ended December 31, 2003, 2002, and 2001. The Partnership intends to
continue to make distributions of cash available to the Limited Partners on a
quarterly basis.
During 2000, the General Partners waived their right to receive future
distributions from the Partnership, including both distributions of operating
cash flow and distributions of liquidation proceeds, to the extent that the
cumulative amount of such distributions would exceed the balance in the General
Partners' capital account as of December 31, 1999. Accordingly, the General
Partners were not allocated any net income and did not receive any distributions
during the years ended December 31, 2003, 2002 and 2001.
As of December 31, 2003 and 2002, the Partnership owed $9,093 and
$12,381, respectively, to affiliates for operating expenses and accounting and
administrative services. As of March 12, 2004, the Partnership had reimbursed
the affiliates for these amounts. In addition, as of December 31, 2003 and 2002,
the Partnership owed $188,155 to affiliates for real estate disposition fees
resulting from services rendered in connection with the sales of several
Properties. 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, decreased to $637,555 at December 31, 2003, from $993,429 at December
31, 2002. The decrease in total liabilities was primarily a result of the
Partnership paying a special distribution to the limited partners that had been
accrued at December 31, 2002 that was larger than the special distribution that
was accrued at December 31, 2003. The General Partners believe that the
Partnership has sufficient cash on hand to meet its current working capital
needs.
Off-Balance Sheet Transactions
The Partnership holds interests in various unconsolidated joint venture
and tenancy in common arrangements that are accounted for using the equity
method. The General Partners do not believe that any such interest would
constitute an off-balance sheet arrangement requiring any additional disclosures
under the provisions of the Sarbanes-Oxley Act of 2002.
Contractual Obligations, Contingent Liabilities, and Commitments
The Partnership has no contractual obligations, contingent liabilities,
or commitments as of December 31, 2003.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Critical Accounting Policies
The Partnership's leases are accounted for under the provisions of
Statement of Financial Accounting Standards No. 13, "Accounting for Leases"
("FAS 13"), and have been accounted for using either the direct financing or the
operating method. FAS 13 requires management to estimate the economic life of
the leased property, the residual value of the leased property and the present
value of minimum lease payments to be received from the tenant. In addition,
management assumes that all payments to be received under its leases are
collectible. Changes in management's estimates or assumptions regarding
collectibility of lease payments could result in a change in accounting for the
lease at the inception of the lease.
The Partnership accounts for its unconsolidated joint ventures using
the equity method of accounting. Under generally accepted accounting principles,
the equity method of accounting is appropriate for entities that are partially
owned by the Partnership, but for which operations of the investee are shared
with other partners. The Partnership's joint venture agreements require the
consent of all partners on all key decisions affecting the operations of the
underlying Property.
Management reviews the Partnership's Properties and investments in
unconsolidated entities periodically for impairment at least once a year or
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The assessment is based on the carrying amount
of the Property or investment at the date it is tested for recoverability
compared to the sum of the estimated future cash flows expected to result from
its operation and sale through the expected holding period. If an impairment is
indicated, the asset is adjusted to its estimated fair value.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"). Accordingly, when the Partnership
makes the decision to sell or commits to a plan to sell a Property within one
year, its operating results are reported as discontinued operations.
Results of Operations
Comparison of the year ended December 31, 2003 to the year ended December 31,
2002
Rental revenues from continuing operations were $977,171 for the year
ended December 31, 2003 as compared to $1,035,106 during the same period in
2002. The decrease in rental revenues from continuing operations during 2003 was
primarily due to the sale of the Property in San Antonio, Texas in 2002. Rental
revenues from continuing operations earned from wholly owned Properties are
expected to remain at reduced amounts as a result of the Partnership
distributing the net sales proceeds from the sale of this Property to the
limited partners during 2002.
During the year ended December 31, 2003 and 2002, the Partnership also
earned $92,737 and $89,048, respectively, in contingent rental income. The
increase was primarily attributable to an increase in gross sales of certain
restaurant Properties, the leases of which require the payment of contingent
rental income.
During the year ended December 31, 2003 and 2002, the Partnership
earned $303,140 and $253,111, respectively, attributable to the net income
earned by joint ventures. The increase in net income earned by joint ventures
during 2003, was partially due to the fact that Houlihan's Restaurant, Inc.,
which leased the Property owned by Show Low Joint Venture, in which the
Partnership owned an approximate 64% interest, was experiencing financial
difficulties and in January 2002, filed for bankruptcy and rejected the lease
relating to this Property. The joint venture recorded a provision for write-down
of assets of approximately $172,200 in 2002. An additional provision of $55,500
was recorded in 2003 relating to this Property. The provision represented the
difference between the carrying value of the Property and its estimated fair
value. In September 2003, the joint venture sold this vacant Property to a third
party and recorded an additional loss of approximately $29,500. In October 2003,
the joint venture was liquidated, and as a result, net income earned by joint
ventures is expected to remain at reduced amounts.
During 2003, none of the Partnership's lessees contributed more than
ten percent of rental revenues (including the Partnership's share of rental
revenues from Properties owned by joint ventures and Properties owned with
affiliates of the General Partners as tenants-in-common), but two Restaurant
Chains, Pizza Hut and Wendy's, each accounted for more than ten percent of
rental revenues (including the Partnership's share of the rental revenues from
Properties owned by joint ventures and Properties owned with affiliates of the
General Partners as tenants-in-common). In 2004, it is anticipated that these
two Restaurant Chains each will continue to account for more than 10% of the
rental revenues to which the Partnership is entitled under the terms of its
leases. Any failure of these Restaurant Chain will materially affect the
Partnership's revenues if the Partnership is not able to re-lease the Properties
in a timely manner. As of December 31, 2003, no single tenant or group of
affiliated tenants leased Properties with an aggregate carrying value in excess
of 20% of the total assets of the Partnership.
During the year ended December 31, 2003 and 2002, the Partnership also
earned $3,677 and $17,649, respectively, in interest and other income. Interest
and other income during 2002 was higher because the Partnership was awarded an
amount during 2002 related to a right-of-way taking at one of its Properties.
Operating expenses, including depreciation and amortization expenses
were $397,535 and $432,975 for the years ended December 31, 2003 and 2002,
respectively. The decrease in operating expenses was partially due to a decrease
in the costs incurred for administrative expenses for servicing the Partnership
and its Properties and a decrease in state tax expense relating to several
states in which the Partnership conducts business.
In June 2002, the Partnership sold its Burger King Property in San
Antonio, Texas resulting in a gain of approximately $133,600. This Property was
identified for sale as of December 31, 2001. Because this Property was
identified for sale prior to the January 2002 implementation of FAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets," the results of
operations relating to this Property were included as Income from Continuing
Operations in the accompanying financial statements.
During 2002, the Partnership identified and sold four Properties that
were classified as Discontinued Operations in the accompanying financial
statements. During the year ended December 31, 2001, the building on the Casper,
Wyoming Property was partially destroyed by fire and subsequently demolished. In
connection with the destruction of the building by the fire, during the year
ended December 31, 2001, the Partnership recorded a provision for write-down of
assets of $78,015, which represented the loss incurred by the Partnership in
excess of anticipated insurance proceeds. The Partnership contested the
settlement of the insurance claim, and in June 2002, received an additional
$88,777 in insurance proceeds, which the Partnership recorded as an adjustment
to the loss incurred in this Property due to fire. In June 2002, in connection
with the anticipated sale of the land, the Partnership recorded a provision for
write-down of assets of $63,714. The provision represented the difference
between the carrying value of the land and its estimated fair value. In August
2002, the Partnership sold the land to a third party resulting in a loss on
disposal of assets of $10,626.
During October 2001, Phoenix Restaurant Group, Inc. and its
Subsidiaries (collectively referred to as "PRG"), a tenant of the Partnership,
filed for Chapter 11 bankruptcy protection and rejected the lease related to the
Denny's in Rock Springs, Wyoming. In June 2002, in connection with the
anticipated sale of this Property, the Partnership recorded a provision for
write-down of assets of approximately $113,600. The Partnership has also
recorded a provision for write-down of assets in previous years. The provision
represented the difference between the carrying value of the Property and its
estimated fair value. In August 2002, the Partnership sold the Property to a
third party resulting in a loss on disposal of assets of approximately $15,300.
In June 2002, the Partnership recorded a provision for write-down of
assets of approximately $181,200 relating to the Property in Pineville,
Louisiana since the tenant opted to not renew its lease, which expired in June
2002, and vacated the Property. The provision represented the difference between
the carrying value of the Property and its estimated fair value. In December
2002, the Partnership sold this Property. Since the Partnership had recorded a
provision for write-down of assets for this Property, no additional gain or loss
was recognized on the sale.
In September 2002, the Partnership recorded a provision for write-down
of assets of approximately $139,800 relating to the Property in Tomball, Texas
in anticipation of the sale of this Property. The provision represented the
difference between the carrying value of the Property and its estimated fair
value. This Property was vacant since the tenant opted to not renew its lease,
which expired in May 2002. In October 2002, the Partnership sold the Property to
a third party. Since the Partnership had recorded a provision for write-down for
this Property, no additional gain or loss was recognized on the sale.
In September 2003, Show Low Joint Venture, in which the Partnership
owned a 64% interest, sold its Property in Greensboro, North Carolina, as
described above. The financial results relating to this Property were classified
as discontinued operations in the combined, condensed financial information for
the joint ventures and the Properties held with affiliates of the general
partners as tenants-in-common reported in the footnotes to the accompanying
financial statements. The Partnership's pro-rata share of these amounts was
included in equity in earnings of joint ventures in the accompanying financial
statements.
In December 2003, Holland Joint Venture, in which the Partnership owns
a 49% interest, entered into negotiations with a third party to sell the
Property in Holland, Michigan. As a result, the joint venture reclassified the
assets relating to this property from land and building on operating leases to
real estate held for sale. The Property was recorded at the lower of its
carrying amount or fair value less cost to sell. In addition, the joint venture
stopped recording depreciation upon identifying the Property as held for sale.
The financial results for this property are reflected as Discontinued Operations
in the condensed joint venture financial information presented in the footnotes
to the accompanying financial statements.
Comparison of the year ended December 31, 2002 to the year ended December 31,
2001
Rental revenues from continuing operations were $1,035,106 for the year
ended December 31, 2002 as compared to $1,118,018 during the same period in
2001. The decrease in rental revenues from continuing operations during 2002 was
primarily due to the sales of the Properties in San Antonio and Bay City, Texas
in 2002 and 2001, respectively. Rental revenues from continuing operations from
wholly owned Properties are expected to remain at reduced amounts as a result of
the Partnership distributing the net sales proceeds relating to these two sales
to the Limited Partners.
During 2001, the former lease for the Property in Hueytown, Alabama,
which was scheduled to expire in June 2002, was terminated by the Partnership
and the tenant. In connection with the termination of this lease, the
Partnership recognized $13,112 in lease termination income.
During the year ended December 31, 2002 and 2001, the Partnership also
earned $89,048 and $72,771, respectively, in contingent rental income. The
increase was primarily attributable to an increase in gross sales of certain
restaurant Properties, the leases of which require the payment of contingent
rental income.
During the year ended December 31, 2002 and 2001, the Partnership
earned $253,111 and $441,969, respectively, attributable to the net income
earned by joint ventures. The decrease in net income earned by joint ventures
during 2002, was partially due to the fact that Houlihan's Restaurant, Inc.,
which leased the Property owned by Show Low Joint Venture, in which the
Partnership owned an approximate 64% interest, was experiencing financial
difficulties and in January 2002, filed for bankruptcy and rejected the lease
relating to this Property. The joint venture recorded a provision for write-down
of assets of approximately $172,200. The provision represented the difference
between the carrying value of the Property and its estimated fair value.
The decrease in net income earned by joint ventures during 2002 was
also partially due to the fact that in August 2001, Peoria Joint Venture, in
which the Partnership owned a 48% interest, sold its Property, and the
Partnership dissolved the joint venture in accordance with the joint venture
agreement. The Partnership expects that net income earned by joint ventures will
remain at reduced levels as a result of the Partnership distributing to the
Limited Partners the majority of the liquidating distribution received by the
Partnership from the joint venture.
The decrease in net income earned by joint ventures during 2002, was
partially offset because the Partnership and CNL Income Fund V, Ltd., as
tenants-in-common, re-leased the Property in Mesa, Arizona which was vacant
since June 2000, to a new tenant in September 2001 with terms substantially the
same as the Partnership's other leases.
During the year ended December 31, 2002 and 2001, the Partnership
earned $17,649 and $41,240, respectively, in interest and other income. Interest
and other income during 2001 was higher because higher average cash balances due
to the net sales proceeds received from the sale of Properties pending
distribution to the Limited Partners.
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets, were $432,975 and $448,715 for the years
ended December 31, 2002 and 2001, respectively. The decrease in operating
expenses was primarily due to a decrease in depreciation expense because the
Partnership sold Properties in 2002 and 2001.
In June 2002, the Partnership sold its Burger King Property in San
Antonio, Texas resulting in a gain of approximately $133,600. This Property was
identified for sale as of December 31, 2001. In September 2001, the Partnership
sold its Property in Bay City, Texas to the tenant resulting in a gain of
approximately $204,200.
During the year ended December 31, 2001, the Property located in
Casper, Wyoming, was partially destroyed by fire and subsequently demolished.
During the year ended December 31, 2001, the Partnership recorded a provision
for write-down of assets of approximately $78,000, which represented the loss
incurred by the Partnership in excess of anticipated insurance proceeds. In June
2002, an additional provision of approximately $63,700 was recorded. In August
2002, the Partnership sold the Land to a third party.
The Partnership recorded provisions for write-down of assets of
approximately $113,600 and $145,500 in the years ended December 31, 2002 and
2001, respectively, relating to the Denny's Property in Rock Springs, Wyoming
because of the PRG, bankruptcy. The provisions represented the difference
between the carrying value of the Property and its estimated fair value. In
August 2002, the Partnership sold the Property.
In June 2002, the Partnership recorded a provision for write-down of
assets of approximately $181,200 relating to the Property in Pineville,
Louisiana when the tenant opted to not renew its lease. In December 2002, the
Partnership sold this Property.
In September 2002, the Partnership recorded a provision for write-down
of assets of approximately $139,800 relating to the Property in Tomball, Texas.
This Property had been vacant since the tenant opted to not renew its lease,
which expired in May 2002. In October 2002, the Partnership sold the Property to
a third party.
The General Partners continuously evaluate strategic alternatives for
the Partnership, including alternatives to provide liquidity to the Limited
Partners.
The Partnership's leases as of December 31, 2003 are generally
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. Inflation, overall, has had a minimal effect on
results of operations of the Partnership. Continued inflation 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.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities" to expand upon and strengthen existing accounting guidance
that addresses when a company should include the assets, liabilities and
activities of another entity in its financial statements. To improve financial
reporting by companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that company is
subject to a majority risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. Prior to FIN 46, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. In December 2003, the FASB issued FASB Interpretation No. 46R
("FIN 46R"), to clarify some of the provisions of FIN 46. Under FIN 46R, special
effective date provisions apply to entities that have fully or partially applied
FIN 46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities is required
in financial statements for periods ending after March 15, 2004. The Partnership
did not fully or partially apply FIN 46 prior to the issuance of FIN 46R. Also,
the Partnership does not have interests in structures commonly referred to as
special-purpose entities. Therefore, application of FIN 46R is required in the
Partnership's financial statements for periods ending after March 15, 2004. The
General Partners believe adoption of this standard may result in either
consolidation or additional disclosure requirements of the Partnership's
unconsolidated joint ventures, which are currently accounted for under the
equity method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
Report of Independent Certified Public Accountants 20
Financial Statements:
Balance Sheets 21
Statements of Income 22
Statements of Partners' Capital 23
Statements of Cash Flows 24-25
Notes to Financial Statements 26-39
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund II, Ltd.
In our opinion, the accompanying balance sheets and the related statements of
income, of partners' capital and of cash flows present fairly, in all material
respects, the financial position of CNL Income Fund II, Ltd. (a Florida limited
partnership) at December 31, 2003 and 2002 and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2003
in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedules
listed in the index appearing under item 15(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 of America, 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 our opinion.
As described in Note 1 to the financial statements, on January 1, 2002, the
Partnership adopted Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
March 24, 2004
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2003 2002
----------------- -----------------
ASSETS
Real estate properties with operating leases, net $ 6,565,138 $ 6,752,686
Investment in joint ventures 3,621,892 4,000,984
Cash and cash equivalents 922,370 1,193,910
Certificate of deposit 60,483 61,824
Receivables, less allowance for doubtful accounts of
$28,888, in 2003 38,192 43,505
Accrued rental income 185,490 182,640
Other assets 6,537 7,045
----------------- -----------------
$ 11,400,102 $ 12,242,594
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 71,534 $ 71,100
Real estate taxes payable 21,680 8,720
Distributions payable 459,380 834,380
Due to related parties 197,248 200,536
Rents paid in advance and deposits 84,961 79,229
----------------- -----------------
Total liabilities 834,803 1,193,965
Commitments and Contingencies (Note 9)
Partners' capital 10,565,299 11,048,629
----------------- -----------------
$ 11,400,102 $ 12,242,594
================= =================
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2003 2002 2001
---------------- --------------- ----------------
Revenues:
Rental income from operating leases $ 977,171 $ 1,035,106 $ 1,118,018
Contingent rental income 92,737 89,048 72,771
Lease termination income -- -- 13,112
Interest and other income 3,677 17,649 41,240
--------------- ---------------- ---------------
1,073,585 1,141,803 1,245,141
---------------- --------------- ----------------
Expenses:
General operating and administrative 182,135 211,181 210,493
Property related 17,786 24,273 18,100
State and other taxes 9,550 15,666 18,223
Depreciation and amortization 188,064 181,855 201,899
---------------- --------------- ----------------
397,535 432,975 448,715
---------------- --------------- ----------------
Income before gain on sale of assets and equity in
earnings of unconsolidated joint ventures 676,050 708,828 796,426
Gain on sale of assets -- 133,603 204,179
Equity in earnings of unconsolidated joint ventures 303,140 253,111 441,969
---------------- --------------- ----------------
Income from continuing operations 979,190 1,095,542 1,442,574
---------------- --------------- ----------------
Discontinued operations
Loss from discontinued operations -- (391,529 ) (188,828 )
Loss on disposal of discontinued operations -- (25,967 ) --
---------------- --------------- ----------------
-- (417,496 ) (188,828 )
---------------- --------------- ----------------
Net income $ 979,190 $ 678,046 $ 1,253,746
================ =============== ================
Income (loss) per limited partner unit
Continuing operations $ 19.58 $ 21.91 $ 28.85
Discontinued operations -- (8.35 ) (3.78 )
---------------- --------------- ----------------
$ 19.58 $ 13.56 $ 25.07
================ =============== ================
Weighted average number of limited partner units
outstanding 50,000 50,000 50,000
================ =============== ================
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2003, 2002, and 2001
General Partners Limited Partners
------------------------------------- -----------------------------------------------------
Accumulated Accumulated
Contributions Earnings Contributions Distributions Earnings
------------------ ---------------- ----------------- ---------------- -------------
Balance, December 31, 2000 $ 162,000 $ 243,788 $ 23,907,878 $ (33,732,194 ) $ 27,263,746
Distributions to limited
partners ($58.27 per
limited partner unit) -- -- (542,529 ) (2,371,121 ) --
Net income -- -- -- -- 1,253,746
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2001 162,000 243,788 23,365,349 (36,103,315 ) 28,517,492
Distributions to limited
partners ($62.50 per
limited partner unit) -- -- (733,876 ) (2,391,033 ) --
Net income -- -- -- -- 678,046
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2002 162,000 243,788 22,631,473 (38,494,348 ) 29,195,538
Distributions to limited
partners ($29.25 per
limited partner unit) -- -- -- (1,462,520) --
Net income -- -- -- -- 979,190
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2003 $ 162,000 $ 243,788 $ 22,631,473 $ (39,956,868) $ 30,174,728
================== ================ ================= ================ ==============
See accompanying notes to financial statements.
Syndication
Costs Total
-------------- --------------
$ (2,689,822 ) $15,155,396
-- (2,913,650 )
-- 1,253,746
-------------- --------------
(2,689,822 ) 13,495,492
-- (3,124,909 )
-- 678,046
-------------- --------------
(2,689,822 ) 11,048,629
-- (1,462,520)
-- 979,190
-------------- --------------
$ (2,689,822) $10,565,299
============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
---------------- ---------------- ---------------
Cash flows from operating activities:
Net income $ 979,190 $ 678,046 $ 1,253,746
---------------- ---------------- ---------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 187,548 207,815 263,950
Amortization 516 516 516
Provision for doubtful accounts -- -- 52,295
Provision for write-down of assets -- 498,312 223,550
Gain of sale of assets -- (197,873 ) (204,179 )
Equity in earnings of joint ventures, net of
distributions 100,166 153,871 29,154
Decrease (increase) in receivables 5,313 (30,372 ) 28,626
Decrease in due from related parties -- 1,575 6,935
Decrease (increase) in accrued rental income (2,850 ) (3,896 ) 4,283
Decrease (increase) in other assets (8 ) (3,968 ) 526
Increase (decrease) in accounts payable and
accrued expenses and real estate taxes 13,394 (12,369 ) (12,938 )
payable Increase (decrease) in due to
related parties (3,288 ) 8,569 361
Increase in rents paid in advance and deposits 5,732 33,801 24,941
---------------- ---------------- ---------------
Total adjustments 306,523 655,981 418,020
---------------- ---------------- ---------------
Net cash provided by operating activities 1,285,713 1,334,027 1,671,766
---------------- ---------------- ---------------
Cash flows from investing activities:
Proceeds from sale of real estate properties -- 1,786,443 548,874
Insurance proceeds for casualty loss on building -- 227,579 --
Liquidating distribution from joint venture 278,926 -- 830,263
Net (increase) decrease in certificate of deposit 1,341 -- (60,038 )
---------------- ---------------- ---------------
Net cash provided by investing activities 280,267 2,014,022 1,319,099
---------------- ---------------- ---------------
Cash flows from financing activities:
Proceeds from loan from corporate general partner -- -- 75,000
Repayment of loan from corporate general partner -- -- (75,000 )
Distributions to limited partners (1,837,520 ) (2,714,025 ) (2,923,482 )
---------------- ---------------- ---------------
Net cash used in financing activities (1,837,520 ) (2,714,025 ) (2,923,482 )
---------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents (271,540 ) 634,024 67,383
Cash and cash equivalents at beginning of year 1,193,910 559,886 492,503
---------------- ---------------- ---------------
Cash and cash equivalents at end of year $ 922,370 $ 1,193,910 $ 559,886
================ ================ ===============
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
2003 2002 2001
--------------- --------------- --------------
Supplemental schedule of non-cash investing and financing activities:
Deferred real estate disposition fees incurred
and unpaid at end of period $ -- $ 55,329 $ 16,620
=============== =============== ==============
Distributions declared and unpaid at
December 31 $ 459,380 $ 834,380 $ 423,496
=============== =============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
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% 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 real
estate property acquisitions at cost. The properties are leased to
third parties generally 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.
During the years ended December 31, 2003, 2002, and 2001, tenants paid
or are expected to pay, directly to real estate taxing authorities
$150,093, $167,500, and $177,800, respectively, in estimated real
estate taxes in accordance with the terms of their triple net leases
with the Partnership.
The leases of the Partnership provide for base minimum annual rental
payments payable in monthly installments. In addition, certain leases
provide for contingent rental revenues based on the tenants' gross
sales in excess of a specified threshold. The partnership defers
recognition of the contingent rental revenues until the defined
thresholds are met.
The leases are accounted for using the operating method. Under the
operating method, real estate property 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 rental revenues 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.
Substantially all leases are for 15 to 20 years and provide for minimum
and contingent rentals. 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 of 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.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
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. 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, assets
are adjusted to the fair value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, a provision is recorded to increase the
allowance for doubtful accounts. If amounts are subsequently determined
to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership invested in Kirkman Road
Joint Venture with unaffiliated entities. The Partnership also invested
in Holland Joint Venture and Show Low Joint Venture, prior to its
liquidation in December 2003, 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. These
entities are accounted for using the equity method since each joint
venture agreement requires the consent of all partners on all key
decisions affecting the operations of the underlying Property.
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.
Cash accounts maintained on behalf of the Partnership in demand
deposits at commercial banks may exceed federally insured levels;
however, the Partnership has not experienced any losses in such
accounts.
Lease Costs - Other assets included lease incentive costs and brokerage
and legal fees associated with negotiating leases and 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 represent a reduction
of Partnership equity and a reduction in the basis of each partner's
investment.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
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.
Reclassification - Certain items in the prior year's financial
statements have been reclassified to conform to 2003 presentation.
These reclassifications had no effect on partner's capital, net income
or cash flows.
Statement of Financial Accounting Standards No. 144 - Effective January
1, 2002, the Partnership adopted Statement of Financial Accounting
Standards No. 144 ("FAS 144") "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement requires that a
long-lived asset be tested for recoverability whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset.
The assessment is based on the carrying amount of the asset at the date
it is tested for recoverability. An impairment loss is recognized when
the carrying amount of a long-lived asset exceeds its estimated fair
value. If an impairment is recognized, the adjusted carrying amount of
a long-lived asset is its new cost basis. The statement also requires
that the results of operations of a component of an entity that either
has been disposed of or is classified as held for sale be reported as a
discontinued operation if the disposal activity was initiated
subsequent to the adoption of the Standard.
FASB Interpretation No. 46 - In January 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," to expand upon and
strengthen existing accounting guidance that addresses when a company
should include the assets, liabilities and activities of another entity
in its financial statements. To improve financial reporting by
companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that
company is subject to a majority risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only
if it controlled the entity through voting interests. In December 2003,
the FASB issued FASB Interpretation No. 46R ("FIN 46R"), to clarify
some of the provisions of FIN 46. Under FIN 46R, special effective date
provisions apply to entities that have fully or partially applied FIN
46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests
in structures that are commonly referred to as special-purpose entities
for periods ending after December 15, 2003. Application by public
entities, other than small business issuers, for all other types of
variable interest entities is required in financial statements for
periods ending after March 15, 2004. The Partnership did not fully or
partially apply FIN 46 prior to the issuance of FIN 46R. Also, the
Partnership does not have interests in structures commonly referred to
as special-purpose entities. Therefore, application of FIN 46R is
required in the Partnership's financial statements for periods ending
after March 15, 2004. The general partners believe adoption of this
standard may result in either consolidation or additional disclosure
requirements of the Partnership's unconsolidated joint ventures, which
are currently accounted for under the equity method. However, such
consolidation is not expected to significantly impact the Partnership's
results of operations.
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
2. Real Estate Properties with Operating Leases
Real estate properties with operating leases consisted of the following
at December 31:
2003 2002
-------------------- -------------------
Land $ 3,989,212 $ 3,989,212
Buildings 5,435,719 5,435,719
-------------------- -------------------
9,424,931 9,424,931
Less accumulated depreciation (2,859,793) (2,672,245 )
-------------------- -------------------
$ 6,565,138 $ 6,752,686
==================== ===================
In June 2002, the Partnership sold its Burger King property in San
Antonio, Texas and received net sales proceeds of approximately
$747,500, resulting in a gain of approximately $133,600. In connection
with the sale, the Partnership incurred a deferred, subordinated, real
estate disposition fee of $22,500. Payment of the real estate
disposition fee is subordinated to receipt by the limited partners of
their aggregate, cumulative 10% Preferred Return, plus their adjusted
capital contributions. This property was identified for sale as of
December 31, 2001.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 2003:
2004 $ 849,162
2005 779,522
2006 774,468
2007 550,369
2008 279,451
Thereafter 1,002,343
-----------------
$ 4,235,315
=================
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
3. Investment in Joint Ventures
The Partnership has a 50% and 49% interest in the profits and losses of
Kirkman Road Joint Venture and Holland Joint Venture, respectively. The
remaining interest in the Holland Joint Venture is held by affiliates
of the general partners. The Partnership also has a 33.87%, 57.91%,
47%, 37.01%, 39.39%, and a 13.38% interest in properties in Arvada,
Colorado; Mesa, Arizona; Smithfield, North Carolina; Vancouver,
Washington; Overland Park, Kansas; and Memphis, Tennessee,
respectively, with affiliates of the general partners, as
tenants-in-common. Amounts relating to these investments are included
in investment in joint ventures.
In August 2001, Peoria Joint Venture, in which the Partnership owned a
48% interest, sold its property to a third party for approximately
$1,786,900 resulting in a gain of approximately $136,700. The
Partnership dissolved the joint venture in accordance with the joint
venture agreement and did not incur a gain or loss on the dissolution.
The Partnership received approximately $830,300 representing its
pro-rata share of the liquidation proceeds from the joint venture.
In January 2002, Houlihan's Restaurant, Inc., which leased the property
owned by Show Low Joint Venture, filed for bankruptcy and rejected the
lease relating to this property. Based on a pending contract to sell
the property, the joint venture, in which the Partnership owned a 64%
interest, recorded a provision for write-down of assets of
approximately $172,200 during the year ended December 31, 2002. The
joint venture had recorded a provision for write-down of assets in a
previous year relating to this property. The contract for the sale of
the property was subsequently terminated. In September 2003, Show Low
Joint Venture sold the property to a third party and recorded a loss on
disposal of discontinued operations of approximately $29,500. In
December 2003, the Partnership and the joint venture partner dissolved
the joint venture and the Partnership received approx