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 September 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
September 30, 1997 and December 31, 1996
(unaudited)
Assets
------
1997 1996
---- ----
Current assets:
Cash and cash equivalents including amounts
held by property manager (Note 1)............. $ 111,172 152,259
Accrued interest receivable..................... 55 247
------------ ------------
Total current assets.......................... 111,227 152,506
------------ ------------
Investment property (including acquisition fees
paid to Affiliates of $59,500 at September 30,
1997 and December 31, 1996 (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................... 310,976 283,553
Total investment property, net of ------------ ------------
accumulated depreciation.................... 1,224,285 1,251,708
------------ ------------
Installment contracts receivable (Note 3)......... 80,000 80,000
Accrued rents receivable (Notes l and 4).......... 67,637 79,374
Deferred loan costs (net of accumulated
amortization of $7,325 at September 30, 1997
(Note 1)........................................ 15,143 -
Deferred leasing fees to Affiliates (net of
accumulated amortization of $15,325 and $13,326
at September 30, 1997 and December 31, 1996,
respectively) (Note 1).......................... 10,661 12,660
------------ ------------
Total assets...................................... $ 1,508,953 1,576,248
============ ============
See accompanying notes to financial statements.
-2-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Balance Sheets
(continued)
September 30, 1997 and December 31, 1996
(unaudited)
Liabilities and Partners' Capital
---------------------------------
1997 1996
Current liabilities: ---- ----
Mortgage payable................................ $ 59,236 59,021
Accrued interest payable........................ - 6,275
Due to Affiliates (Note 2)...................... 3,310 1,159
------------ ------------
Total current liabilities..................... 62,546 66,455
------------ ------------
Commission payable to Affiliates (Note 2)......... 135,000 135,000
Long-term debt, less current portion
(Notes 3 and 3)................................. 802,959 851,755
------------ ------------
Total liabilities............................. 1,000,505 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......................... 15,414 15,060
Cumulative cash distributions................. (9,241) (8,861)
------------ ------------
6,673 6,699
Limited Partners: ------------ ------------
Units of $1,000. Authorized 25,000 Units,
4,004.25 Units outstanding September 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......................... 1,526,031 1,491,012
Cumulative cash distributions................. (4,575,614) (4,526,031)
------------ ------------
491,825 506,389
------------ ------------
Total Partners' capital..................... 498,498 513,088
------------ ------------
Total liabilities and Partners' capital........... $ 1,508,953 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 nine months ended September 30, 1997 and 1996
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
Income: ---- ---- ---- ----
Rental income (Note 4)........... $ 51,661 51,661 154,983 154,983
Interest income.................. 3,259 3,318 9,748 9,275
---------- ---------- ---------- ----------
54,920 54,979 164,731 164,258
---------- ---------- ---------- ----------
Expenses:
Professional services to
Affiliates..................... 1,525 1,090 3,937 5,113
Professional services to
non-affiliates................. - - 17,575 18,600
General and administrative
expenses to Affiliates......... 2,727 3,627 11,027 10,492
General and administrative
expenses to non-affiliates..... 921 429 3,528 3,437
Property operating expenses to
Affiliates..................... 555 505 1,667 1,515
Mortgage interest................ 17,995 25,377 54,877 68,417
Depreciation..................... 9,142 9,141 27,423 27,423
Amortization..................... 3,505 667 9,324 3,169
---------- ---------- ---------- ----------
36,370 40,836 129,358 138,166
---------- ---------- ---------- ----------
Net income......................... $ 18,550 14,143 35,373 26,092
========== ========== ========== ==========
Net income allocated to:
General Partner.................. $ 186 142 354 261
Limited Partners................. 18,364 14,001 35,019 25,831
---------- ---------- ---------- ----------
Net income..................... $ 18,550 14,143 35,373 26,092
========== ========== ========== ==========
Net income allocated to the one
General Partner Unit............. $ 186 142 354 261
========== ========== ========== ==========
Net income per 4,004.25 weighted
average Limited Partner Units.... $ 4.59 3.50 8.75 6.45
========== ========== ========== ==========
See accompanying notes to financial statements.
-4-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Statements of Cash Flows
For the nine months ended September 30, 1997 and 1996
(unaudited)
1997 1996
Cash flows from operating activities: ---- ----
Net income...................................... $ 35,373 26,092
Adjustments to reconcile net income to net
cash provided by operating activities:
Accrued rents receivable...................... 11,737 (3,422)
Deferred loan costs........................... (22,468) -
Depreciation.................................. 27,423 27,423
Amortization.................................. 9,324 3,169
Changes in assets and liabilities:
Accrued interest receivable................. 192 (287)
Accounts payable and accrued expenses....... - (926)
Accrued interest payable.................... (6,275) (1,217)
Due to Affiliates........................... 2,151 (2,206)
------------ ------------
Net cash provided by operating activities......... 57,457 48,626
------------ ------------
Cash flows from financing activities:
Principal payments of long-term debt............ (48,581) (22,454)
Distributions................................... (49,963) (17,000)
------------ ------------
Net cash used in financing activities............. (98,544) (39,454)
------------ ------------
Net increase (decrease) in cash and cash
equivalents..................................... (41,087) 9,172
Cash and cash equivalents at beginning of period.. 152,259 106,980
------------ ------------
Cash and cash equivalents at end of period........ $ 111,172 116,152
============ ============
Supplemental disclosure of cash flow information:
Cash paid for mortgage and other interest....... $ 61,152 59,398
============ ============
See accompanying notes to financial statements.
-5-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
September 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 September 30, 1997, included in cash and cash
equivalents, is approximately $13,900 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)
September 30, 1997
(unaudited)
Statement of Financial Accounting Standards No. 121 requires the Partnership to
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. As of September 30, 1997, the
Partnership has not recognized any such impairment on its property.
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)
September 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 $3,310 and $1,159
remained unpaid at September 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 $1,667 and $1,515
for the nine months ended September 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)
September 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 $11,737 and
an increase of $3,422 in 1997 and 1996, respectively of rental income for the
period of occupancy for which stepped rent increases apply and $67,637 and
$79,374 in related accounts receivable as of September 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 October 1997, the Partnership paid a distribution of $15,220, of which
$132 was distributed to the General Partner and $15,088 was distributed to the
Limited Partners. The Limited Partners' distribution included $2,000 of
repayment proceeds and $13,088 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
September 30, 1997, the Partnership has repurchased 34 Units ($33,993) from
various Limited Partners through the Unit Repurchase Program.
At September 30, 1997, the Partnership had cash and cash equivalents of
$111,172, which includes approximately $13,900 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 nine months ended
September 30, 1997, as compared to the nine months ended September 30, 1996, is
due to a decrease in accounting fees to Affiliates.
The increase in general and administrative expenses to Affiliates for the nine
months ended September 30, 1997, as compared to the nine months ended September
30, 1996, is due to an increase in data processing.
The decrease in mortgage interest expense for the three and nine months ended
September 30, 1997, as compared to the three and nine months ended September
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 nine months ended
September 30, 1997, as compared to the three and nine months ended September
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: November 12, 1997
/S/ PATRICIA A. CHALLENGER
By: Patricia A. Challenger
Senior Vice President
Date: November 12, 1997
/S/ KELLY TUCEK
By: Kelly Tucek
Principal Financial Officer and
Principal Accounting Officer
Date: November 12, 1997
-12-
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