UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 1997
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 #0-16780
Inland Real Estate Growth Fund II, L.P.
(Exact name of registrant as specified in its charter)
Delaware #36-3547165
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
2901 Butterfield Road, Oak Brook, Illinois 60523
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 630-218-8000
N/A
(Former name, former address and former fiscal
year, if changed since last report)
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 requirements for the past 90 days. Yes X No
-1-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Balance Sheets
June 30, 1997 and December 31, 1996
(unaudited)
Assets
------
1997 1996
---- ----
Current assets:
Cash and cash equivalents including amounts
held by property manager (Note 1)............. $ 105,055 152,259
Accrued interest receivable..................... 164 247
------------ ------------
Total current assets.......................... 105,219 152,506
------------ ------------
Investment property (including acquisition fees
paid to Affiliates of $59,500 at June 30,
1996 and December 31, 1995 (Notes 1 and 2):
Land............................................ 438,389 438,389
Building and improvements....................... 1,096,872 1,096,872
------------ ------------
1,535,261 1,535,261
Less accumulated depreciation................... 301,834 283,553
Total investment property, net of ------------ ------------
accumulated depreciation.................... 1,233,427 1,251,708
------------ ------------
Installment contracts receivable (Note 3)......... 80,000 80,000
Accrued rents receivable (Notes l and 4).......... 71,549 79,374
Deferred loan costs (net of accumulated
amortization of $4,486 at June 30, 1997
(Note 1)........................................ 17,982 -
Deferred leasing fees to Affiliates (net of
accumulated amortization of $14,659 and $13,326
at June 30, 1997 and December 31, 1996,
respectively) (Note 1).......................... 11,327 12,660
------------ ------------
Total assets...................................... $ 1,519,504 1,576,248
============ ============
See accompanying notes to financial statements.
-2-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Balance Sheets
(continued)
June 30, 1997 and December 31, 1996
(unaudited)
Liabilities and Partners' Capital
---------------------------------
1997 1996
Current liabilities: ---- ----
Accounts payable and accrued expenses........... $ 12 -
Current portion of long-term debt
(Notes 2 and 3)............................... 58,031 59,021
Accrued interest payable........................ - 6,275
Due to Affiliates (Note 2)...................... 2,084 1,159
------------ ------------
Total current liabilities..................... 60,127 66,455
Commission payable to Affiliates (Note 2)......... 135,000 135,000
Long-term debt, less current portion
(Notes 2 and 3)............................... 819,560 851,755
------------ ------------
Total liabilities............................. 1,014,687 1,053,210
------------ ------------
Deferred gain on sale of investment property
(Note 3)........................................ 9,950 9,950
Partners' capital (Notes 1 and 2):
General Partner:
Capital contribution.......................... 500 500
Cumulative net income......................... 15,228 15,060
Cumulative cash distributions................. (9,112) (8,861)
------------ ------------
6,616 6,699
Limited Partners: ------------ ------------
Units of $1,000. Authorized 25,000 Units,
4,004.25 Units outstanding June 30, 1997
and at December 31, 1996 (net of offering
costs of $462,849, of which $59,476 was
paid to Affiliates)......................... 3,541,408 3,541,408
Cumulative net income......................... 1,507,667 1,491,012
Cumulative cash distributions................. (4,560,824) (4,526,031)
------------ ------------
488,251 506,389
------------ ------------
Total Partners' capital..................... 494,867 513,088
------------ ------------
Total liabilities and Partners' capital........... $ 1,519,504 1,576,248
============ ============
See accompanying notes to financial statements.
-3-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Statements of Operations
For the three and six months ended June 30, 1997 and 1996
(unaudited)
Three months Six months
ended ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
Income: ---- ---- ---- ----
Rental income (Note 4)........... $ 51,661 51,661 103,322 103,322
Interest income.................. 3,209 3,133 6,489 5,957
---------- ---------- ---------- ----------
54,870 54,794 109,811 109,279
Expenses: ---------- ---------- ---------- ----------
Professional services to
Affiliates..................... 872 1,830 2,412 4,023
Professional services to
non-affiliates................. - 100 17,575 18,600
General and administrative
expenses to Affiliates......... 2,160 2,668 8,300 6,865
General and administrative
expenses to non-affiliates..... 1,559 2,370 2,607 3,009
Property operating expenses to
Affiliates..................... 556 505 1,112 1,010
Mortgage interest................ 18,308 20,319 36,882 43,040
Depreciation..................... 9,140 9,140 18,281 18,281
Amortization..................... 3,357 828 5,819 2,502
---------- ---------- ---------- ----------
35,952 37,760 92,988 97,330
---------- ---------- ---------- ----------
Net income......................... $ 18,918 17,034 16,823 11,949
========== ========== ========== ==========
Net income allocated to:
General Partner.................. $ 189 170 168 119
Limited Partners................. 18,729 16,915 16,655 11,830
---------- ---------- ---------- ----------
Net income..................... $ 18,918 17,034 16,823 11,949
========== ========== ========== ==========
Net income allocated to the one
General Partner Unit:............ $ 189 170 168 119
========== ========== ========== ==========
Net income per 4,004.25 weighted
average Limited Partner Units.... $ 4.68 4.22 4.16 2.95
========== ========== ========== ==========
See accompanying notes to financial statements.
-4-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Statements of Cash Flows
For the six months ended June 30, 1997 and 1996
(unaudited)
1997 1996
Cash flows from operating activities: ---- ----
Net income...................................... $ 16,823 11,949
Adjustments to reconcile net income to net
cash provided by operating activities:
Accrued rents receivable...................... 7,825 (2,281)
Deferred loan costs........................... (22,468) -
Depreciation.................................. 18,281 18,281
Amortization.................................. 5,819 2,502
Changes in assets and liabilities:
Accrued interest receivable................. 83 (203)
Accounts payable and accrued expenses....... 12 (182)
Accrued interest payable.................... (6,275) (1,129)
Due to Affiliates........................... 925 (1,716)
------------ ------------
Net cash provided by operating activities......... 21,025 27,221
------------ ------------
Cash flows from financing activities:
Principal payments of long-term debt............ (33,185) (9,671)
Distributions................................... (35,044) (17,000)
------------ ------------
Net cash used in financing activities............. (68,229) (26,671)
------------ ------------
Net increase (decrease) in cash and cash
equivalents..................................... (47,204) 550
Cash and cash equivalents at beginning of period.. 152,259 106,980
------------ ------------
Cash and cash equivalents at end of period........ $ 105,055 107,530
============ ============
Supplemental disclosure of cash flow information:
Cash paid for mortgage and other interest....... $ 43,157 43,987
============ ============
See accompanying notes to financial statements.
-5-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
June 30, 1997
(unaudited)
Readers of this Quarterly Report should refer to the Partnership's audited
financial statements for the fiscal year ended December 31, 1996, which are
included in the Partnership's 1996 Annual Report, as certain footnote
disclosures which would substantially duplicate those contained in such audited
financial statements have been omitted from this Report.
(1) Organization and Basis of Accounting
Inland Real Estate Growth Fund II, L.P. (the "Partnership"), was formed in June
1987, pursuant to the Delaware Revised Uniform Limited Partnership Act, to
invest in improved residential, retail, industrial and other income producing
properties. On September 21, 1987, the Partnership commenced an Offering of
25,000 Limited Partnership Units (the "Units") pursuant to a Registration
Statement on Form S-11 under the Securities Act of 1933. The Partnership
terminated the Offering on September 21, 1989. A total of 4,038.25 Units were
sold to the public at $1,000 per Unit, yielding gross offering proceeds of
$4,038,250, not including the General Partner's contribution of $500. All of
the holders of these Units were admitted to the Partnership. As of September
30, 1996, the Partnership has repurchased a total of 34 Units ($33,993) from
various Limited Partners. At June 30, 1997, included in cash and cash
equivalents, is approximately $13,700 restricted for use by the Unit Repurchase
Program. The Limited Partners of the Partnership share in their portion of
benefits of ownership of the Partnership's real property investment according
to the number of Units held. Inland Real Estate Investment Corporation is the
General Partner.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Offering costs have been offset against the Limited Partners' capital accounts.
Deferred loan costs are amortized on a straight-line basis over the life of the
loan. Deferred leasing fees are amortized on a straight-line basis over the
term of the related lease.
Installment contracts receivable origination fees received are deferred as
unearned income and amortized as yield adjustments on a straight-line basis
over the life of the related installment contracts receivable.
-6-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
June 30, 1997
(unaudited)
The Partnership adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS 121") as required in the first quarter of 1996. SFAS
121 requires that the Partnership record an impairment loss on its property to
be held for investment whenever its carrying value cannot be fully recovered
through estimated undiscounted future cash flows from their operations and
sale. The amount of the impairment loss to be recognized would be the
difference between the property's carrying value and the property's estimated
fair value. The adoption of SFAS 121 did not have any effect on the
Partnership's financial position, results of operations or liquidity.
The Partnership uses the straight-line method of depreciation with a useful
life of thirty years for buildings and improvements. Maintenance and repair
expenses are charged to operations as incurred. Significant improvements are
capitalized and depreciated over their estimated useful lives.
Rental income is recognized on a straight-line basis over the term of the
lease. The excess of rental income earned over the cash rent due under the
provisions of the lease agreement is recorded as accrued rent receivable.
The Partnership considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
No provision for Federal income taxes has been made as the liability for such
taxes is that of the Partners rather than the Partnership.
In the opinion of management, the financial statements contain all the
adjustments necessary, which are of a normal recurring nature, to present
fairly the financial position and results of operations. Interim periods are
not necessarily indicative of results to be expected for the year.
-7-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
June 30, 1997
(unaudited)
(2) Transactions with Affiliates
The General Partner and its Affiliates are entitled to reimbursement for
salaries and expenses of employees of the General Partner and its Affiliates
relating to the administration of the Partnership, of which $2,084 and $1,159
remained unpaid at June 30, 1997 and December 31, 1996, respectively.
In connection with the sales at Wellington Place, the Partnership has recorded
$135,000 of sales commissions payable to Affiliates of the General Partner.
Such commissions will be deferred until the Limited Partners have received
their Original Capital plus a return as specified in the Partnership Agreement.
An Affiliate of the General Partner is entitled to receive Property Management
Fees for management and leasing services. Management fees of $1,112 and $1,010
for the six months ended June 30, 1997 and 1996, have been incurred and paid to
an Affiliate and are included in the Partnership's property operating expenses
to Affiliates.
(3) Installment Contracts Receivable
During 1991, the Partnership sold all of the eighteen buildings comprising the
Wellington Place apartment complex to unaffiliated third parties. The
Partnership had recorded wrap around installment contracts receivable of
$3,988,999 as a result of these sales, with interest rates ranging from 10.5%
to 10.9% due over seven to ten years. The gain of $616,858 was to be
recognized as cash was received over the life of the related installment
contracts.
The Partnership has received complete prepayments on all of the eighteen
installment contracts receivable amounting to $3,609,589, which included
prepayment penalties of $10,830, less credit to the borrowers for prepaid
interest. In conjunction with five of the prepayments, the Partnership
provided a single borrower with five second mortgages, in the amount of $16,000
each, which require interest-only payments at the rate of 10% per annum with a
final balloon payment due June 30, 1998, collateralized by five of the
buildings previously sold.
-8-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
June 30, 1997
(unaudited)
(4) Accrued Rents Receivable
The health club lease contains provisions providing for stepped rent increases.
Generally accepted accounting principles require that rental income be recorded
for the period of occupancy using the effective monthly rent, which is the
average monthly rent for the entire period of occupancy during the term of the
lease. The accompanying financial statements include a decrease of $7,825 and
an increase of $2,281 in 1997 and 1996, respectively of rental income for the
period of occupancy for which stepped rent increases apply and $71,549 and
$79,374 in related accounts receivable as of June 30, 1997 and December 31,
1996, respectively. Those amounts are expected to be collected over the terms
of the related leases as scheduled rent payments are made.
(5) Mortgage Payable
The General Partner obtained an extension until February 1, 1999 from the
current first mortgage holder on the mortgage loan collateralized by the
Scandinavian Health Club property. Monthly principal and interest payments are
based on an interest rate of 8.25% adjusted annually, based on a ten year
amortization period.
(6) Subsequent Events
During July 1997, the Partnership paid a distribution of $14,919, of which $129
was distributed to the General Partner and $14,790 was distributed to the
Limited Partners. The Limited Partners' distribution included $2,000 of
repayment proceeds and $12,790 of operating cash flow.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this quarterly report on
Form 10-Q constitute of "forward-looking statements" within the meaning of the
Federal Private Securities Litigation Reform Act of 1995. These forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the Partnership's actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by these forward-looking statements. These
factors include, among other things, federal, state or local regulations;
adverse changes in general economic or local conditions; inability of borrower
to meet financial obligations; uninsured losses; and potential conflicts of
interest between the Partnership and its Affiliates, including the General
Partner.
Liquidity and Capital Resources
On September 21, 1987, the Partnership commenced an Offering of 25,000 Limited
Partnership Units pursuant to a Registration Statement on Form S-11 under the
Securities Act of 1933. The Offering terminated on September 21, 1989 with a
total of 4,038.25 Units being sold to the public at $1,000 per Unit resulting
in $4,038,250 in gross offering proceeds, not including the General Partner's
contribution, of which $3,077,513 was invested in two properties. In addition,
proceeds were used to repay advances from the General Partner, pay offering and
organization costs and make distributions to the Limited Partners. As of June
30, 1997, the Partnership has repurchased 34 Units ($33,993) from various
Limited Partners through the Unit Repurchase Program.
At June 30, 1997, the Partnership had cash and cash equivalents of $105,055,
which includes approximately $13,700 restricted for the repurchase of Units
through the Unit Repurchase Program. The Partnership intends to use available
cash for working capital requirements and cash distributions.
The Partnership is generating sufficient cash flow to cover operating expenses
and debt service. To the extent that these sources are insufficient to meet
the Partnership's needs, the Partnership may rely on advances from Affiliates
of the General Partner, other short-term financing or may sell the remaining
property.
The General Partner has agreed to make, if necessary, a Supplemental Capital
Contribution. The Supplemental Capital Contribution shall be in an amount
which will enable the Partnership to pay a liquidating distribution to the
Limited Partners equal to their Adjusted Invested Capital plus a noncompounded
Minimum Return of 2% per annum on their Invested Capital. After consideration
of the Supplemental Capital Contribution, the Partnership believes that it has
sufficient funds to satisfy its obligations.
-10-
Results of Operations
As of December 31, 1991, the Partnership had sold all of the eighteen buildings
comprising the Wellington Place Apartment complex. The remaining property
owned by the Partnership, a health club, is leased until October 2001 to
Scandinavian Health Spa Inc., a wholly owned subsidiary of Bally's Health and
Tennis Corporation on a "triple-net" basis, which means that in addition to
paying base rent, the tenant is also responsible for the payment of insurance,
real estate taxes and maintenance. The General Partner does not anticipate an
early termination of this lease.
The decrease in professional services to Affiliates for the three and six
months ended June 30, 1997, as compared to the three and six months ended June
30, 1996, is due to a decrease in accounting fees to Affiliates.
The increase in general and administrative expenses to Affiliates for the six
months ended June 30, 1997, as compared to the six months ended June 30, 1996,
is due to an increase in data processing.
The decrease in mortgage interest expense for the three and six months ended
June 30, 1997, as compared to the three and six months ended June 30, 1996, is
due to a decrease in the adjustable rate mortgage on the health club property
from 9.625% to 8.25% in May 1996.
The increase in amortization expense for the three and six months ended June
30, 1997, as compared to the three and six months ended June 30, 1996, is due
to loan costs associated with the extension of the mortgage loan collateralized
by the Scandinavian Health Club property which are being amortized on a
straight-line basis over the life of the loan.
PART II - Other Information
Items 1 through 5 are omitted because of the absence of conditions under which
they are required.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None
-11-
SIGNATURES
Pursuant to the requirements 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.
INLAND REAL ESTATE GROWTH FUND II, L.P.
By: Inland Real Estate Investment Corporation
General Partner
/S/ ROBERT D. PARKS
By: Robert D. Parks
Chairman
Date: August 11, 1997
/S/ PATRICIA A. CHALLENGER
By: Patricia A. Challenger
Senior Vice President
Date: August 11, 1997
/S/ KELLY TUCEK
By: Kelly Tucek
Principal Financial Officer and
Principal Accounting Officer
Date: August 11, 1997
-12-
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