<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Commission File No.: 2-84754
Ended September 30, 1995
INDEPRO PROPERTY FUND II, L.P.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
600 Dresher Road, Horsham, PA 19044
- ------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
DELAWARE 51-0270624
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
(215) 956-0400
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days.
YES ______X________ NO ________________
There is no public market for the Limited Partnership Interests. Non-affiliates
hold 12,566 Limited Partnership Interests as of September 30,1995.
<PAGE>
INDEPRO PROPERTY FUND II, L.P.
INDEX OF FINANCIAL STATEMENTS
Page Number
-----------
Part I - Financial Information
Item 1 - Financial Statements of Indepro Property Fund II, L.P.
Balance Sheets as of September 30, 1995
and December 31, 1994 3
Statements of Income for the three months and nine
months ended September 30, 1995 and 1994 4
Statement of Partners' Capital (Deficit) for the
nine months ended September 30, 1995 5
Statements of Cash Flows for the nine months
ended September 30, 1995 and September 30, 1994 6
Notes to Financial Statements 7-10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
Part II - Other Information 17-18
2
<PAGE>
INDEPRO PROPERTY FUND II, L.P.
(A Delaware Limited Partnership)
Balance Sheets
As of September 30, 1995 and December 31, 1994
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
---- ----
Assets
<S> <C> <C>
Investment in real estate at cost (Note 3) $5,338,157 $24,380,516
Less: Accumulated depreciation, amortization and
valuation allowance of $875,000 in 1995 and
$585,000 in 1994 2,783,677 10,428,010
---------- -----------
Total investments 2,554,480 13,952,506
Cash and cash equivalents 2,393,668 2,298,407
Accounts receivable (net of allowance for doubtful
accounts of $512 in 1995 and $6,618 in 1994) 23,498 40,215
Deferred rent receivable 84,632 107,670
Prepaid expenses and other assets 14,511 11,747
---------- -----------
Total assets $5,070,789 $16,410,545
========== ===========
Liabilities and Partners' Capital
Notes payable (Note 6) $1,781,677 $13,075,019
Accrued real estate taxes 67,747 96,065
Other accrued liabilities 2,500 36,238
Security deposits on leases 29,102 25,496
Accounts payable 33,607 235,686
---------- -----------
Total Liabilities 1,914,633 13,468,505
Partners' capital 3,156,156 2,942,040
---------- -----------
Total liabilities and partners' capital $5,070,789 $16,410,545
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
INDEPRO PROPERTY FUND II, L.P.
(A Delaware Limited Partnership)
Statements of Income
For the three and nine months ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 1995 Sept. 30, 1994 Sept. 30, 1995 Sept. 30, 1994
-------------- -------------- -------------- --------------
Income
<S> <C> <C> <C> <C>
Rental Income $ 93,324 $ 648,192 $ 405,439 $ 1,954,694
Miscellaneous income 29,160 149,297 88,092 424,613
Investment income 28,251 22,167 92,125 56,929
---------- ----------- ---------- -----------
Total Income 150,735 819,656 585,656 2,436,236
---------- ----------- ---------- -----------
Expenses
Interest on notes payable 47,813 408,308 215,231 1,233,149
Depreciation and amortization 51,951 225,814 484,305 675,951
Real estate taxes 21,300 137,255 63,027 354,333
Property operating expense 37,112 80,259 135,604 215,429
Administrative 7,326 13,735 30,546 44,678
Repairs and maintenance 12,645 - 21,656 24,747
Loss on disposal of real estate - - 3,449,234 -
Estimated property valuation allowance - - 375,000 -
---------- ---------- ---------- ----------
Total Expenses 178,147 865,371 4,774,603 2,548,287
---------- ---------- ---------- ----------
Net income (loss) before extraordinary item (27,412) (45,715) 4,188,947) (112,051)
Gain on extinguishment of debt - - 4,403,062 -
---------- ---------- ---------- ----------
Net income (loss) $ (27,412) $ (45,715) $ 214,115 $ (112,051)
========== ========== ========== ==========
Net income (loss) allocated to Limited Partners (27,138) (45,258) 211,974 (110,931)
Net income (loss) allocated to General Partner (274) (457) 2,141 (1,121)
---------- ---------- ---------- ----------
$ (27,412) $ (45,715) $ 214,115 $ (112,051)
========== ========== ========== ==========
Net income (loss) per limited partnership
interest outstanding (30,000):
Net income (loss) before extraordinary item (1) (2) (138) (4)
Extraordinary item - - 145 -
---------- ---------- ---------- ----------
Net income (loss) $ (1) $ (2) $ 7 $ (4)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
INDEPRO PROPERTY FUND II, L.P.
(A Delaware Limited Partnership)
Statement of Partners' Capital (Deficit)
For the nine months ended September 30, 1995
<TABLE>
<CAPTION>
General Limited
General Partnership Partnership
Partner Units Units Total
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Partners' capital (deficit) at January 1, 1995 $(101,081) $1,642,103 $1,401,018 $2,942,040
Net loss for the period ended March 31, 1995 (1,546) (69,210) (83,888) (154,644)
--------- ---------- ---------- ----------
Partners' capital (deficit) at March 31, 1995 (102,627) 1,572,893 1,317,130 2,787,396
Net income for the period ended June 30, 1995 3,962 177,305 214,905 396,172
--------- ---------- ---------- ----------
Partners' capital (deficit) at June 30, 1995 (98,665) 1,750,198 1,532,035 3,183,568
Net loss for the period ended September 30, 1995 (274) (12,269) (14,869) (27,412)
--------- ---------- ---------- ----------
Partners' capital (deficit) at September 30, 1995 $ (98,939) $1,737,929 $1,517,166 $3,156,156
========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
INDEPRO PROPERTY FUND II, L.P.
(A Delaware Limited Partnership)
Statements of Cash Flows
For the nine months ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
Sept. 30, 1995 Sept. 30, 1994
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
- ------------------------------------
Net income (loss) $ 214,115 $ (112,051)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 484,305 675,951
Provision for property valuation allowance 375,000 -
Loss on disposal of real estate 3,449,234 -
Gain on extinguishment of debt (4,403,062) -
Change in assets and liabilities
Decrease (increase) in accounts receivable 16,717 (20,632)
Decrease in deferred rent receivable 23,038 10,567
Decrease (increase) in prepaid expenses (2,764) 4,535
Decrease in accrued liabilities (62,056) (47,928)
Increase in security deposits on leases 3,606 3,081
Increase (decrease) in accounts payable 34,617 51,221
---------- ----------
Net cash provided by operating activities 132,750 564,743
---------- ----------
Cash flows from investing activities
- ------------------------------------
Additions to real estate (10,513) (61,608)
---------- ----------
Net cash used in investing activities (10,513) (61,608)
---------- ----------
Cash flows from financing activities
- ------------------------------------
Repayment of notes payable (26,976) (246,937)
---------- ----------
Net cash used in financing activities (26,976) (246,937)
---------- ----------
Net increase in cash and cash equivalents 95,261 256,198
Cash and cash equivalents, beginning of period 2,298,407 1,822,697
---------- ----------
Cash and cash equivalents, end of period $2,393,668 $2,078,895
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
INDEPRO PROPERTY FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
As of September 30, 1995
1. General
The preceding unaudited financial information sets forth the operations of
Indepro Property Fund II, L.P. for the nine months ended September 30, 1995.
In the opinion of management, the financial statements reflect all
adjustments necessary to present fairly the results of operations for the
nine months ended September 30, 1995.
The footnotes are presented pursuant to Rule 10-01 of Regulation S-X and do
not include complete financial information otherwise made in the Form 10-K.
These interim financial statements should be read in conjunction with the
Form 10-K for the year ended December 31, 1994.
2. Partners' Capital
The General Partner did not make any cash distributions from operations to
the Partners during the nine months ended September 30, 1995 or the year
ended December 31, 1994. However, in October 1995, the General Partner made a
distribution of $1,121,212 from excess Partnership cash. This distribution
amounted to $37 per Limited Partnership Unit.
The General Partner is obligated under the terms of the Partnership Agreement
to make capital contributions upon the Partnership's dissolution in the
amount necessary to enable the Partnership to pay to each Limited Partner an
8% non-compounded return on the unrecovered capital contribution of each
Limited Partner, less all distributions of distributable cash and all
distributions of sale or refinancing proceeds in excess of the capital
contributions of such Limited Partner. This guaranteed return is computed
from the date of each Limited Partner's admission to the Partnership. This
obligation does not guarantee to the Limited Partners a return of their
capital contributions and is limited by the available assets of the
Partnership and the General Partner.
3. Investments in Real Estate
Investments in real estate consisted of the following as of September 30,
1995:
<TABLE>
<CAPTION>
Building and
Property Land Improvements Total
<S> <C> <C> <C>
710 East Ogden Avenue $1,060,000 $4,278,157 $5,338,157
Less: Accumulated depreciation and
amortization and valuation
allowance of $875,000 - 2,783,677 2,783,677
---------- ---------- ----------
Total $1,060,000 $1,494,480 $2,554,480
========== ========== ==========
</TABLE>
7
<PAGE>
INDEPRO PROPERTY FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
As of September 30, 1995
3. Investments in Real Estate (continued):
On June 15, 1995, the Partnership conveyed title to the Moorestown I and II
Corporate Center properties to the lender by deed-in-lieu of foreclosure, in
full satisfaction of the outstanding non-recourse mortgage loans payable on
the properties. The Partnership recognized losses of $792,021 and $2,657,213
on Moorestown I and II respectively, representing the difference between the
fair market value of the properties and the book values. These losses were
offset by gain from extinguishment of debt. (See notes payable footnote,
Note 6.)
On at least an annual basis, the General Partner prepares an estimate of
value for the property in the Partnership. The methodology used is either a
discounted cash flow analysis or a value based on a direct capitalization of
cash flow. This information is used to assist the General Partner in
determining net realizable value of the assets of the Partnership. A
valuation allowance is provided for assets in cases where the realizable
value is less than the carrying amount of the asset. In addition, assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable.
During 1993, an estimated property valuation allowance of $500,000 was
established related to 710 East Ogden, due to the slower than anticipated
leasing activity and the operating losses incurred by the building in recent
years. On May 3, 1995, the Partnership entered into a letter of intent with
an unrelated third party for the sale of 710 East Ogden at a price of
$3,100,000. However, due to issues raised during the due diligence process,
combined with a change in ownership and management of the potential buyer
during the negotiation, the sale of the property to this buyer could not be
completed at the original offer price. The General Partner was forced to
pursue other potential purchasers for the property. Because the other
purchase offers received by the General Partner were at least $300,000 less
than the original offer, an additional valuation allowance of $375,000 was
established in the second quarter of 1995 for the 710 East Ogden property.
The General Partner currently has a signed purchase and sale agreement for
the property to an unrelated third party at a sales price of $2,815,000 with
the sale expected to occur in November, 1995.
4. Cash Flow Information:
For purposes of the Statements of Cash Flows, the Partnership considers
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. Net cash provided by operating activities
reflects cash payments for interest of $164,370 and $1,233,149 respectively,
during the nine months ended September 30, 1995 and September 30, 1994.
5. Concentration of Credit Risk:
With the conveyance of the Moorestown Corporate Center I and II properties to
the lender by deed-in-lieu of foreclosure in June 1995, the Partnership's
operations now consist exclusively of an investment in a commercial office
building located in Naperville, Illinois. The Partnership maintains adequate
levels of property and liability insurance for the property. The Partnership
performs credit evaluations of its lessees and generally does not require
collateral other than security deposits for most tenants.
The Partnership invests its excess cash in deposits primarily through a major
commercial bank. Cash available in these accounts may at times exceed FDIC
insurance levels.
6. Notes Payable:
On November 1, 1993, the Partnership was obligated to make a balloon payment
of $4,884,732 on the Moorestown Corporate Center I mortgage due to New
England Mutual Life Insurance Company (New England). The Partnership did not
make the balloon payment which created a default under the loan documents. On
November 16, 1993, the Partnership agreed to remit, on a monthly basis, all
net cash flows generated by the property until such time as a loan
modification was closed or New England obtained title to the property.
8
<PAGE>
INDEPRO PROPERTY FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
As of September 30, 1995
6. Notes Payable (continued):
On April 26, 1994, New England directed the Partnership to stop collecting
rents directly from the tenant in Moorestown I. These actions were taken by
New England in spite of the General Partner's request to continue to operate
under the provisions of the pre-workout agreement whereby the rents were
forwarded from the Partnership to New England on a monthly basis. On November
9, 1994, New England filed suit in the Superior Court of New Jersey, Chancery
Division, Burlington County, seeking foreclosure on Moorestown Corporate
Center I, to obtain title to the property and for the appointment of a
receiver for the rents, issues and profits of the property. On December 14,
1994, the Partnership filed an answer to the Complaint. On January 17, 1995,
New England filed a Motion for Summary Judgment on the Complaint, seeking
foreclosure and requesting oral argument on February 24, 1995. This Motion
for Summary Judgment was granted in March 1995. On June 15, 1995, Indepro
Property Fund II, L.P. conveyed title to the Moorestown Corporate Center I to
New England Mutual Life Insurance Company via a deed-in-lieu of foreclosure
in full satisfaction of the non-recourse mortgage loan payable on the
property. The estimated fair market value of the property at the date of
deed-in-lieu of foreclosure was $3,750,000. The total mortgage loan and
accrued interest payable at that date was $5,049,899. Accordingly, the
Partnership recognized gain from extinguishment of debt of $1,299,899 related
to this transaction.
In addition, on October 31, 1994, New England filed suit in the Court of
Common Pleas of Montgomery County, Pennsylvania, seeking judgment against
Indepro Property Fund II, L.P. and Indepro Property Fund II Corp. (the
General Partner) in the sum of $115,106.66 plus costs and attorney's fees.
This suit related to the cash flows from the Moorestown I property for April
and May 1994 which were collected by Indepro Property Fund II, L.P. and not
remitted to New England. As part of the deed-in-lieu of foreclosure, New
England has dismissed this suit, allowing the Partnership to retain the cash
flows for those months.
On January 1, 1995, the Partnership was obligated to make balloon payments
totaling $6,376,637 on the Moorestown Corporate Center II mortgages due to
New England Mutual Life Insurance Company. The Partnership did not make the
balloon payments which created a default under the loan documents. On January
4, 1995, New England directed the Partnership to stop collecting rents
directly from the tenant in Moorestown II. New England threatened to sue the
Partnership for the rents totaling $129,000 collected in January 1995 for the
Moorestown II property. On March 14, 1995, New England Mutual Life Insurance
Company filed suit in the Superior Court of New Jersey, Chancery Division,
Burlington County, seeking foreclosure on Moorestown Corporate Center II, to
obtain title to the property and for appointment of a receiver for the rents,
issues and profits of the property. On June 15, 1995, Indepro Property Fund
II, L.P. conveyed title to the Moorestown Corporate Center II to New England
Mutual Life Insurance Company via a deed-in-lieu of foreclosure transaction
in full satisfaction of the non-recourse mortgage loans payable on the
property. The estimated fair market value of the property at the date of
deed-in-lieu of foreclosure was $3,350,000. The amount of the mortgage loans
and accrued interest payable at that date was $6,453,164. Accordingly, the
Partnership recognized gain from extinguishment of debt of $3,103,164 related
to this transaction. As part of the deed-in-lieu of foreclosure, the
Partnership paid $70,000 to New England which related to the interest accrued
on the Moorestown II loan payable for the month of January 1995, and was
allowed to retain $59,000 of the approximately $129,000 in rents collected in
January 1995.
The General Partner, on behalf of the Partnership, and New England delivered
mutual releases to each other waiving any rights of future claims under the
various loan documents.
The above actions will result in significant tax implications to the Limited
Partners.
9
<PAGE>
INDEPRO PROPERTY FUND II, L.P.
NOTES TO FINANCIAL STATEMENTS
As of September 30, 1995
6. Notes Payable (continued):
The non-recourse mortgage loan on the 710 East Ogden property required a
balloon payment of $1,795,338 on April 1, 1995. The General Partner had
received approval for a four-month extension on the loan under the same terms
as the original loan to allow the Partnership additional time to market the
property for sale. In July, 1995, the General Partner reached an agreement
with Traveler's Insurance (the lender) whereby, Indepro Corp. (the advisor)
would purchase the loan on the 710 East Ogden property. The General Partner
believed that this action was in the best interests of the Partnership, in
order to facilitate the orderly sale of the property and to restore the loan
to a current status, avoiding a default interest rate 2% higher than the
original loan terms and avoiding any further threats of the lender to begin
foreclosure proceedings. Under the agreement, Indepro Corp. wired funds to an
account designated by Traveler's in an amount sufficient to complete the loan
purchase. Traveler's agreed to hold the funds in an interest-bearing escrow
account until the sooner of September 30, 1995 or the sale of the property.
Payments would continue to be made to Traveler's by the Partnership under the
terms of the existing loan. If any of the dates for approval or agreement
regarding the sale of the property were not met by the purchaser, Traveler's
had the right, but not the obligation, to withdraw the funds from the escrow
account with no additional approval required by Indepro Corp. or the
Partnership. The loan would then be owned by Indepro Corp. The Partnership
and the lender operated under the terms of this agreement until August
2,1995, at which time a signed contract with the purchaser was required.
Although the General Partner and the purchaser continued to negotiate in good
faith, no signed contract was obtained, and Traveler's withdrew the funds to
effect the purchase of the loan by Indepro Corp. The General Partner
currently has a signed purchase and sale agreement for the property to an
unrelated third party at a sales price of $2,815,000 with the sale expected
to occur in November, 1995. The General Partner expects the proceeds from the
sale to be adequate to repay the mortgage loan.
10
<PAGE>
INDEPRO PROPERTY FUND II, L.P.
(A Delaware Limited Partnership)
Part I - Item 2
Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------
Operations
----------
Results of Operations
The Partnership's net income for the nine months ended September 30, 1995 was
$214,115, a favorable change of $326,168 from the same period of the previous
year. The increase in net income is primarily attributable to gain from
extinguishment of debt of $4,403,062 recognized on the conveyance of the
Moorestown I and II Corporate Centers to the lender by deed-in-lieu of
foreclosure, partially offset by a loss on disposal of the real estate of
$3,449,234. Additionally, a loss of $375,000 was recorded to increase the
estimated property valuation allowance on the 710 East Ogden property. (See
discussion of results under individual property headings below.)
All of the properties owned by the Partnership have been negatively impacted by
the generally depressed condition of the commercial real estate market in recent
years. The economic recession, excess supply of commercial space in most markets
and corporate downsizing have contributed to the negative trend. Leasing
activity has been slower than anticipated and new leases have not always
provided the same level of income to the Partnership. With the development of a
new aggressive marketing plan to lease vacant space at the 710 East Ogden
property, the General Partner has been able to improve the occupancy rate and
the operating results of this property during 1994 and 1995. The General Partner
currently has a signed purchase and sale agreement for the property to an
unrelated third party at a sales price of $2,815,000 with the sale expected to
occur in November, 1995.
On June 15, 1995, title to the Moorestown Corporate Center I and the Moorestown
Corporate Center II was conveyed to the lender, New England Mutual Life
Insurance Company, by deed-in-lieu of foreclosure, in full satisfaction of the
non-recourse mortgage loans outstanding on the properties. As the loans
outstanding exceeded the fair market value of the properties, the General
Partner determined that this was the best course of action. Gains of $1,299,899
and $3,103,164 on Moorestown I and II respectively, were recognized,
representing the difference between the fair market value of the properties and
the outstanding debt amounts. These gains were partially offset by losses on the
disposal of the real estate of $792,021 and $2,657,213 on Moorestown I and II
respectively, representing the difference between the fair market value of the
properties and the book values. No rental income or operating expenses have been
recognized in 1995 for the Moorestown I property due to the foreclosure
proceedings. Rental income and expense was recognized only for the month of
January 1995 on the Moorestown II property.
Net income (loss) by property was as follows for the nine months ended
September 30:
<TABLE>
<CAPTION>
Property 1995 1994
<S> <C> <C> <C>
710 East Ogden Avenue $(531,970) $(206,621)
Moorestown Corporate Center I 394,093 (126,330)
Moorestown Corporate Center II 283,903 192,466
Other 68,089 28,434
---------- ---------
Total $ 214,115 $(112,051)
========== =========
</TABLE>
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (continued)
- ---------------------
Results of Operations (Continued):
710 East Ogden (East Ogden)
The net loss attributable to the operations of East Ogden increased by $325,349
from the nine months ended September 30, 1994 to the nine months ended September
30, 1995. This increase in loss is attributable to an additional property
valuation allowance of $375,000 established to reflect the expected sales price
of the property. Operating results of the property, excluding this charge,
improved by $49,651, in comparison with the same period of the prior year
primarily due to higher occupancy levels at the property.
East Ogden, located in Naperville, Illinois, a suburb of Chicago, has in recent
years, been under severe competitive pressure from other office buildings in its
market area. Occupancy levels have been increasing over the past year. On
September 30, 1995, the building's occupancy rate stood at 72% compared to 65%
on September 30, 1994 and 65% on December 31, 1994. In order to increase the
occupancy of East Ogden, a comprehensive marketing plan was developed for the
property which focuses on attracting small businesses by increasing the
visibility of the property.
During 1993, an estimated property valuation allowance of $500,000 was
established related to 710 East Ogden, due to the slower than anticipated
leasing activity and the operating losses incurred by the building in recent
years. On May 3, 1995, the Partnership entered into a letter of intent with an
unrelated third party for the sale of 710 East Ogden at a price of $3,100,000.
However, due to issues raised during the due diligence process, combined with a
change in ownership and management of the potential buyer during the
negotiation, the sale of the property to this buyer could not be completed at
the original offer price. The General Partner was forced to pursue other
potential purchasers for the property. Because the other purchase offers
received by the General Partner were at least $300,000 less than the original
offer, an additional valuation allowance of $375,000 was established in the
second quarter of 1995 for the 710 East Ogden property. The General Partner
currently has a signed purchase and sale agreement for the property to an
unrelated third party at a sales price of $2,815,000 with the sale expected to
occur in November, 1995.
Moorestown Corporate Center I (Moorestown I)
Net income attributable to the operations of Moorestown I was $394,093 for the
nine months ended September 30, 1995, an increase of $520,423 from the same
period of the previous year. This increase in net income is primarily
attributable to income of $1,299,899 recognized as a result of the forgiveness
of non-recourse debt by New England on the property, partially offset by a loss
on disposal of the real estate of $729,021. Rental income and tenant
reimbursements for the Moorestown I property decreased by $686,572 from
September 30, 1994 to September 30, 1995. No rental income or related expenses
were recognized during 1995 due to the impending foreclosure on the Moorestown I
building. (See discussion under Liquidity and Capital Resources section.) The
decrease in rental income is partially offset by a decrease in interest expense,
real estate taxes and property operating expenses of $457,025, $147,265 and
$30,579, respectively, all due to the foreclosure proceedings. In addition,
depreciation expense decreased by $57,141 from the nine months ended September
30, 1994 to the nine months ended September 30, 1995 due to the fact that only a
half year of depreciation expense was taken. The foreclosure on the Moorestown I
Corporate Center will have a significant impact on the 1995 operating results of
the Partnership.
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (continued)
- ----------------------
Results of Operations (continued):
Moorestown Corporate Center II (Moorestown II)
Net income attributable to Moorestown II was $283,903 as of September 30, 1995,
an increase of $91,437 from September 30, 1994. This increase in income was
primarily attributable to income of $3,103,164 recognized as a result of the
forgiveness of the non-recourse debt by New England upon on the conveyance of
title to the Moorestown Corporate Center II property to the lender by
deed-in-lieu of foreclosure, which was partially offset by a loss on the
disposal of the real estate of $2,657,213. The Moorestown II building had been
100% occupied by Lockheed Martin since its acquisition, producing stable rental
income through January of 1995. However, the Lockheed Martin lease expired on
January 31, 1995 and Lockheed Martin vacated the building in March, 1995. Rental
income and tenant reimbursements for the nine months ended September 30, 1995
totaled $129,352, which represents the lease payment for January 1995, which was
received by the Partnership. This is a reduction of $1,202,852 from the income
received in the same period of the prior year. This reduction in income was
partially offset by a reduction in interest expense, real estate taxes and
property operating expenses of $557,989, $150,133 and $29,121, respectively. In
addition, depreciation expense decreased by $107,089 from the nine months ended
September 30, 1994 to the nine months ended September 30, 1995 due to the fact
that only a half year depreciation was taken in 1995. On January 4, 1995, New
England Mutual Life Insurance Company directed the Partnership to stop
collecting rents directly from the tenant. Accordingly, with the exception of
the rental income collected for January 1995, the Partnership has stopped
recognizing the income and accruing expenses for the Mooretown II building. The
General Partner paid $70,000 of the approximately $129,000 in rental payments
received for January 1995 as interest to New England and retained the balance of
$59,000 as part of the negotiated terms of the deed-in-lieu transaction. The
deed-in-lieu of foreclosure on the Moorestown Corporate Center II will have a
significant impact on the 1995 operating results of the Partnership.
Liquidity and Capital Resources
As of September 30, 1995, the Partnership had cash totaling $2,393,668 in
comparison with $2,298,407 at December 31, 1994 and $2,078,895 at September 30,
1994. This increase in cash is a result of net cash provided by operations and
the suspension of partner distributions. The following is a summary of liquidity
by individual property:
710 East Ogden
The General Partner believes that 710 East Ogden will continue to generate
positive cash flow adequate to meet property operating needs in 1995. In
addition, some funds will continue to be expended on leasing commissions and
improvements to retrofit the vacant space. The General Partner had budgeted
approximately $300,000, to be funded from Partnership cash to be spent on tenant
improvements during 1994 and 1995 to lease the vacant space. Approximately
$200,000 of these funds were expended in 1994. Approximately $11,000 of these
funds have been spent during the first nine months of 1995. Cash flow, however,
was not adequate to make the balloon payment on the mortgage loan discussed
below.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (continued)
- ---------------------
Liquidity and Capital Resources (continued)
710 East Ogden (continued)
The non-recourse mortgage loan on the property required a balloon payment of
$1,795,338 on April 1, 1995. The General Partner had received approval for a
four-month extension on the loan under the same terms as the original loan. In
July, 1995, the General Partner reached an agreement with Traveler's Insurance
(the lender) whereby, Indepro Corp. (the advisor) would purchase the loan on the
710 East Ogden property. The General Partner believed this action was in the
best interests of the Partnership, in order to facilitate the orderly sale of
the property and to restore the loan to a current status, avoiding a default
interest rate 2% higher than the original loan terms and avoiding any further
threats of the lender to begin foreclosure proceedings. Under the agreement,
Indepro Corp. wired funds to an account designated by Traveler's in an amount
sufficient to complete the loan purchase. Traveler's agreed to hold the funds in
an interest-bearing escrow account until the sooner of September 30, 1995 or the
sale of the property. Payments would continue to be made by the Partnership to
Traveler's under the terms of the existing loan. If any of the dates for
approval or agreement regarding the sale of the property were not met by the
purchaser, Traveler's had the right, but not the obligation, to withdraw the
funds from the escrow account with no additional approval required by Indepro
Corp. or the Partnership. The loan would then be owned by Indepro Corp. The
Partnership and the lender operated under the terms of this agreement until
August 2,1995, at which time a signed contract with the purchaser was required.
Although the General Partner and the purchaser continued to negotiate in good
faith, no signed contract was obtained, and Traveler's withdrew the funds to
effect the purchase of the loan by Indepro Corp. The General Partner currently
has a signed purchase and sale agreement for the property to an unrelated third
party at a sales price of $2,815,000 with the sale expected to occur in
November, 1995. The General Partner expects the proceeds from the sale to be
adequate to repay the mortgage loan.
Moorestown I
On November 1, 1993 the Partnership was obligated to make a balloon payment of
$4,884,732 on the mortgage due to New England Mutual Life Insurance Company (New
England) related to the Moorestown I property. The Partnership did not make the
balloon payment which created a default under the loan documents. On November
16, 1993, the Partnership entered into a pre-workout agreement with New England,
whereby the General Partner agreed to remit, on a monthly basis, all net cash
flows generated by the property until such time as a loan modification was
closed or New England obtained title to the property. On April 26, 1994, New
England directed the Partnership to stop collecting rents directly from the
tenant in Moorestown I. These actions were taken by New England in spite of the
General Partner's request to continue to operate under the provisions of the
pre-workout agreement whereby the rents were forwarded from the Partnership to
New England on a monthly basis. The Partnership collected and retained the net
cash flow for April and May 1994. Since June 1994, all net cash flows for the
property have been collected directly from the tenant by an agent of the lender.
On November 9, 1994, New England filed suit in the Superior Court of New Jersey,
Chancery Division, Burlington County, seeking foreclosure on Moorestown
Corporate Center I, to obtain title to the property and for the appointment of a
receiver for the rents, issues and profits of the property. On December 14,
1994, the Partnership filed an answer to the Complaint. On January 17, 1995, New
England filed a Motion for Summary Judgment on the Complaint, seeking
foreclosure and requesting oral argument on February 24, 1995. This Motion for
Summary Judgment was granted in March 1995.
14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (continued)
- ---------------------
Liquidity and Capital Resources (Continued):
Moorestown I (continued)
On June 15, 1995, Indepro Property Fund II, L.P. conveyed title to the
Moorestown Corporate Center I to New England Mutual Life Insurance Company via a
deed-in-lieu of foreclosure in full satisfaction of the non-recourse mortgage
loan payable on the property. The estimated fair market value of the property at
the date of foreclosure was $3,750,000. The total mortgage loan and accrued
interest payable at that date was $5,049,899. Accordingly, the Partnership
recognized income from debt forgiveness of $1,299,899 related to this
transaction.
In addition, on October 20, 1994, New England filed suit in the Court of Common
Pleas of Montgomery County, Pennsylvania, seeking judgment against the
Partnership and the General Partner in the sum of $115,106.66 plus costs and
attorney's fees. This suit relates to the cash flows from the Moorestown I
property for April and May 1994 which were collected by the Partnership and not
remitted to New England. As part of the deed-in-lieu of foreclosure, New England
has dismissed this suit.
Due to the foreclosure proceedings, the Moorestown I building will not require
any significant cash outlays, nor will its operations make any contribution to
the Partnership's cash flow in 1995.
Moorestown II
As discussed in the Results of Operations section above, the lease on the
Moorestown II property expired on January 31, 1995 and Lockheed Martin vacated
the property in March 1995. Lockheed Martin made their rental payment for
January 1995 to the Partnership. The rental payments for February and March 1995
were forwarded directly to Thomas Maher and Company, Inc., as agent for New
England. Being entirely vacant, if the property were retained by the
Partnership, it would be expected to generate negative cash flows in 1995. The
non-recourse debt related to the Moorestown II building required balloon
payments totaling $6,376,637 on January 1, 1995. The Partnership did not have
sufficient funds from operations to make these payments which created a default
under the loan documents. On January 4, 1995, New England directed the
Partnership to stop collecting rents directly from the tenant. On March 14,
1995, New England filed suit in the Superior Court of New Jersey, Chancery
Division, Burlington County, seeking foreclosure on Moorestown Corporate Center
II, to obtain title to the property and for the appointment of a receiver for
the rents, issues and profits of the property.
On June 15, 1995, Indepro Property Fund II, L.P. conveyed title to the
Moorestown Corporate Center II to New England Mutual Life Insurance Company by
deed-in-lieu of foreclosure in full satisfaction of the non-recourse mortgage
loans payable on the property. The estimated fair market value of the property
at the date of foreclosure was $3,350,000. The amount of the mortgage loans and
accrued interest payable at that date was $6,453,164. Accordingly, the
Partnership recognized income from debt forgiveness of $3,103,164 related to
this transaction. As part of the deed-in-lieu of foreclosure, the Partnership
paid $70,000 to New England which related to the interest accrued on the
Moorestown II loan payable for the month of January 1995, and was allowed to
retain $59,000 of the approximately $129,000 in rents collected in January 1995.
Due to the foreclosure proceedings, the Moorestown II building will not require
any significant cash outlays, nor will its operations make any contribution to
the Partnership's cash flow in 1995 other than the $59,000 in net rental
payments retained in January 1995.
15
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (Continued):
- -----------------------
Liquidity and Capital Resources (continued)
Distributions
During the nine months ended September 30, 1995, the Partnership did not make
any distributions to its Limited Partners. However, in October 1995, the General
Partner made a distribution of $1,121,212 from excess Partnership cash. This
distribution amounted to $37 per Limited Partnership Unit.
The General Partner is obligated under the terms of the Partnership Agreement to
make a capital contribution upon the Partnership's dissolution in the amount
necessary to enable the Partnership to pay to each Limited Partner an 8%
non-compounded return on the unrecovered capital contribution of each Limited
Partner, less all distributions of distributable cash and all distributions of
sale or refinancing proceeds in excess of the capital contributions of such
Limited Partner. This guaranteed return is computed from the date of each
Limited Partner's admission to the Partnership. This obligation does not
guarantee to the Limited Partners a return of their capital contributions and is
limited by the available assets of the Partnership and the General Partner. As
of September 30, 1995, the estimated amount of this obligation to the Limited
Partners (excluding the General Partner's Limited Partnership Units) was
approximately $4,202,669. The Partnership had cash of $2,393,668 at September
30, 1995. If the General Partner distributed this cash, the Limited Partners'
share would have been $992,601, which would have reduced the amount of this
obligation to $3,210,068. The General Partner has cash of $1,706,869 and would
have $1,401,067 of its share of Partnership cash for a total of $3,107,936
available to satisfy the remaining obligation. This does not include any
estimated net proceeds from the sale of the 710 East Ogden property which would
be distributed to the General Partner. The General Partner's share of the net
proceeds from the sale of the 710 East Ogden property will be an amount greater
than the current difference between the outstanding guarantee obligation and the
General Partner's cash available at September 30, 1995. Future operations of the
Partnership may impact the ability of the Partnership and the General Partner to
satisfy this obligation. In addition to its various initiatives to improve the
financial condition of the Partnership as discussed herein, the General Partner
is analyzing the potential benefits and liabilities, and their impact on the
Limited Partners, of a dissolution and liquidation of the Partnership. It is
likely that if the 710 East Ogden property is sold in 1995, the Partnership will
be liquidated and any net sale proceeds as well as existing Partnership cash
will be distributed to the Partners.
Inflation
The rate of inflation during the three most recent fiscal years was low in
comparison with the rate prevailing at the time the Partnership's properties
were acquired. Low rates of inflation generally produce an environment in which
rental rate increases are relatively modest. However, major expenses such as
insurance and real estate taxes have increased at a rate greater than the
inflation rate. In the market in which East Ogden competes, it is not always
feasible to pass all increasing costs on in the form of higher rental rates.
Each of the two leases with Martin Marietta protected the Partnership from
increases in operating costs and real estate taxes at the Moorestown Corporate
Centers, since the tenant was responsible for the direct payment of
reimbursement of the majority of the operating costs and real estate taxes.
However, as it became necessary to re-lease the Moorestown buildings to a new
tenant or tenants, potential new leases would not have provided this same
protection. In the past, it was assumed that inflation would result in capital
appreciation in investment properties through increases in rental rates and
replacement costs in comparison with new properties. During the term in which
the real estate properties have been owned by the Partnership, significant
capital appreciation has not occurred.
16
<PAGE>
INDEPRO PROPERTY FUND II, L.P.
(A Delaware Limited Partnership)
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
On November 9, 1994, New England Mutual Life Insurance Company filed
suit in the Superior Court of New Jersey, Chancery Division,
Burlington County, seeking foreclosure on Moorestown Corporate Center
I, to obtain title to the property and for the appointment of a
receiver for the rents, issues and profits of the property. On
December 14, 1994, the Partnership filed an answer to the Complaint.
On January 17, 1995, New England filed a Motion for Summary Judgment
on the Complaint, seeking foreclosure and requesting oral argument on
February 24, 1995. In March, 1995, the Motion for Summary Judgment on
the foreclosure action was granted. On June 15, 1995, Indepro Property
Fund II, L.P. conveyed title to the Moorestown Corporate Center I to
New England Mutual Life Insurance Company via a deed-in-lieu of
foreclosure in full satisfaction of the non-recourse mortgage loan
payable on the property.
In addition, on October 31, 1994, New England filed suit in the Court
of Common Pleas of Montgomery County, Pennsylvania, seeking judgment
against Indepro Property Fund II, L.P. and Indepro Property Fund II
Corp. (the General Partner) in the sum of $115,106.66 plus costs and
attorney's fees. This suit relates to the cash flows from the
Moorestown I property for April and May 1994 which were collected by
Indepro Property Fund II, L.P. and not remitted to New England. As
part of the deed-in-lieu of foreclosure, New England has dismissed
this suit.
The General Partner, on behalf of the Partnership, and New England
delivered mutual releases to each other waiving any rights of future
claims under the various loan documents.
On March 14, 1995, New England Mutual Life Insurance Company filed
suit in the Superior Court of New Jersey, Chancery Division,
Burlington County, seeking foreclosure on Moorestown Corporate Center
II, to obtain title to the property and for the appointment of a
receiver for the rents, issues and profits of the property. On June
15, 1995, Indepro Property Fund II, L.P. conveyed title to the
Moorestown Corporate Center II to New England Mutual Life Insurance
Company via a deed-in-lieu of foreclosure in full satisfaction of the
non-recourse mortgage loans payable on the property. As part of the
deed-in-lieu of foreclosure, the Partnership paid $70,000 to New
England which related to the interest accrued on the Moorestown II
loan payable for the month of January 1995, and was allowed to retain
$59,000 of the approximately $129,000 in rents collected in January
1995.
The General Partner, on behalf of the Partnership, and New England
delivered mutual releases to each other waiving any rights of future
claims under the various loan documents.
The Partnership is involved in an action brought by Celebrity
Restaurants seeking a declaration that an easement exists for access
to and use of certain parking spaces of the 710 East Ogden property by
patrons and employees of the restaurant. The General Partner is not
certain of the outcome of this case at this time, however, the General
Partner does not currently believe this suit will have a material
effect on the Partnership's financial statements.
17
<PAGE>
INDEPRO PROPERTY FUND II, L.P.
(A Delaware Limited Partnership)
PART II
OTHER INFORMATION
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8 - K
No reports were filed on Form 8-K during the quarter ended September
30, 1995.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
INDEPRO PROPERTY FUND II, L.P.
By: Indepro Property Fund II Corp
General Partner
By: /s/ Wayne L. Harris
-------------------
Wayne L. Harris
Vice President
Date: November 13, 1995 By: /s/ Ann M. Strootman
---------------------
Ann M. Strootman
Controller
19
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000722232
<NAME> Indepro Property Fund II, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,393,668
<SECURITIES> 0
<RECEIVABLES> 24,010
<ALLOWANCES> (512)
<INVENTORY> 0
<CURRENT-ASSETS> 2,516,309
<PP&E> 5,338,157
<DEPRECIATION> (2,783,677)
<TOTAL-ASSETS> 5,070,789
<CURRENT-LIABILITIES> 132,956
<BONDS> 1,781,677
<COMMON> 0
0
0
<OTHER-SE> 3,156,156
<TOTAL-LIABILITY-AND-EQUITY> 5,070,789
<SALES> 493,531
<TOTAL-REVENUES> 585,656
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 735,138
<LOSS-PROVISION> 3,824,234
<INTEREST-EXPENSE> 215,231
<INCOME-PRETAX> (4,188,947)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,188,947)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,403,062
<CHANGES> 0
<NET-INCOME> 214,115
<EPS-PRIMARY> 7
<EPS-DILUTED> 7
</TABLE>
