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 March 31, 1998
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
March 31, 1998 and December 31, 1997
(unaudited)
Assets
------
1998 1997
---- ----
Current assets:
Cash and cash equivalents including amounts
held by property manager (Note 1)............. $ 102,174 128,545
Accrued interest receivable..................... 66 274
Installment contracts receivable (Note 3)....... 80,000 80,000
------------ ------------
Total current assets.......................... 182,240 208,819
------------ ------------
Investment property (including acquisition fees
paid to Affiliates of $59,500 at March 31,
1998 and December 31, 1997 (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................... 329,256 320,115
Total investment property, net of ------------ ------------
accumulated depreciation.................... 1,206,005 1,215,146
------------ ------------
Accrued rents receivable (Notes l and 4).......... 59,812 63,724
Deferred loan costs (net of accumulated
amortization of $13,004 and $10,165 at March 31,
1998 and December 31, 1997, respectively)
(Note 1)........................................ 9,464 12,303
Deferred leasing fees to Affiliates (net of
accumulated amortization of $16,658 and $15,991
at March 31, 1998 and December 31, 1997,
respectively) (Note 1).......................... 9,328 9,995
------------ ------------
Total assets...................................... $ 1,466,849 1,509,987
============ ============
See accompanying notes to financial statements.
-2-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Balance Sheets
(continued)
March 31, 1998 and December 31, 1997
(unaudited)
Liabilities and Partners' Capital
---------------------------------
1998 1997
Current liabilities: ---- ----
Accounts payable and accrued expenses........... $ 6,608 -
Current portion of long-term debt............... 830,439 65,740
Accrued interest payable........................ - 5,856
Due to Affiliates (Note 2)...................... 3,555 533
------------ ------------
Total current liabilities..................... 840,602 72,129
------------ ------------
Commission payable to Affiliates (Note 2)......... 135,000 135,000
Long-term debt, less current portion.............. - 786,015
------------ ------------
Total liabilities............................. 975,602 993,144
------------ ------------
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......................... 15,650 15,650
Cumulative cash distributions................. (9,610) (9,374)
------------ ------------
6,540 6,776
Limited Partners: ------------ ------------
Units of $1,000. Authorized 25,000 Units,
4,004.25 Units outstanding at March 31, 1998
and December 31, 1997 (net of offering
costs of $462,849, of which $59,476 was
paid to Affiliates)......................... 3,541,408 3,541,408
Cumulative net income......................... 1,549,374 1,549,411
Cumulative cash distributions................. (4,616,025) (4,590,702)
------------ ------------
474,757 500,117
------------ ------------
Total Partners' capital..................... 481,297 506,893
------------ ------------
Total liabilities and Partners' capital........... $ 1,466,849 1,509,987
============ ============
See accompanying notes to financial statements.
-3-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Statements of Operations
For the three months ended March 31, 1998 and 1997
(unaudited)
1998 1997
Income: ---- ----
Rental income (Note 4).......................... $ 51,661 51,661
Interest income................................. 3,280 3,280
------------ ------------
54,941 54,941
------------ ------------
Expenses:
Professional services to Affiliates............. 966 1,540
Professional services to non-affiliates......... 16,900 17,575
General and administrative expenses to
Affiliates.................................... 5,464 6,140
General and administrative expenses to
non-affiliates................................ 1,096 1,048
Property operating expenses to Affiliates....... 556 556
Mortgage interest............................... 17,349 18,574
Depreciation.................................... 9,141 9,141
Amortization.................................... 3,506 2,462
------------ ------------
54,977 57,036
------------ ------------
Net loss.......................................... $ (37) (2,095)
============ ============
Net loss allocated to:
General Partner................................. - (21)
Limited Partners................................ (37) (2,074)
------------ ------------
Net loss.......................................... $ (37) (2,095)
============ ============
Net loss allocated to the one General
Partner Unit.................................... $ - (21)
============ ============
Net loss per 4,004.25 weighted average Limited
Partnership Units, basic and diluted............ $ (.01) (.52)
============ ============
See accompanying notes to financial statements.
-4-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Statements of Cash Flows
For the three months ended March 31, 1998 and 1997
(unaudited)
1998 1997
Cash flows from operating activities: ---- ----
Net loss........................................ $ (37) (2,095)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Accrued rents receivable...................... 3,912 3,912
Deferred loan costs........................... - (21,535)
Depreciation.................................. 9,141 9,141
Amortization.................................. 3,506 2,462
Changes in assets and liabilities:
Accrued interest receivable................. 208 173
Accounts payable and accrued expenses....... 6,608 10,688
Accrued interest payable.................... (5,856) (6,275)
Due to Affiliates........................... 3,022 5,405
------------ ------------
Net cash provided by operating activities......... 20,504 1,876
------------ ------------
Cash flows from financing activities:
Principal payments of long-term debt............ (21,316) (18,103)
Distributions................................... (25,559) (25,774)
------------ ------------
Net cash used in financing activities............. (46,875) (43,877)
------------ ------------
Net decrease in cash and cash equivalents......... (26,371) (42,001)
Cash and cash equivalents at beginning of period.. 128,545 152,259
------------ ------------
Cash and cash equivalents at end of period........ $ 102,174 110,258
============ ============
Supplemental disclosure of cash flow information:
Cash paid for mortgage and other interest....... $ 23,205 24,849
============ ============
See accompanying notes to financial statements.
-5-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
March 31, 1998
(unaudited)
Readers of this Quarterly Report should refer to the Partnership's audited
financial statements for the fiscal year ended December 31, 1997, which are
included in the Partnership's 1997 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 March 31,
1998, the Partnership has repurchased a total of 34 Units ($33,993) from
various Limited Partners. At March 31, 1998, included in cash and cash
equivalents, is approximately $14,000 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)
March 31, 1998
(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 March 31, 1998, 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.
Statement of Financial Accounting Standards No. 128 "Earnings per Share" was
adopted by the Partnership for the year ended December 31, 1997 and has been
applied to all prior earnings periods presented in the financial statements.
The Partnership has no dilutive securities.
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)
March 31, 1998
(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 $3,555 and $533
remained unpaid at March 31, 1998 and December 31, 1997, respectively.
In connection with the sales at Wellington Place apartment complex, 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 $556 for both the
three months ended March 31, 1998 and 1997, 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. As of March 31, 1998, $9,950 of gain remains to be recognized.
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)
March 31, 1998
(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 $3,912 in
1997 and 1996, respectively of rental income for the period of occupancy for
which stepped rent increases apply and $59,812 and $63,724 in related accounts
receivable as of March 31, 1998 and December 31, 1997, 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 April 1998, the Partnership paid a distribution of $8,120, of which $61
was distributed to the General Partner and $8,059 was distributed to the
Limited Partners. The Limited Partners' distribution included $2,000 of
repayment proceeds and $6,059 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 March
31, 1998, the Partnership has repurchased 34 Units ($33,993) from various
Limited Partners through the Unit Repurchase Program.
At March 31, 1998, the Partnership had cash and cash equivalents of $102,174,
which includes approximately $14,000 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 this 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,
taxes and maintenance. The General Partner does not anticipate an early
termination of this lease.
The decrease in professional services to Affiliates and non-affiliates for the
three months ended March 31, 1998, as compared to the three months ended March
31, 1997, is due to a decrease in accounting and legal services required by the
Partnership.
The decrease in general and administrative expenses to Affiliates for the three
months ended March 31, 1998, as compared to the three months ended March 31,
1997, is due to a decrease in investor service charges and mortgage servicing
fees offset by an increase in data processing.
The decrease in mortgage interest expense for the three months ended March 31,
1998, as compared to the three months ended March 31, 1997, is due to a
decrease in the adjustable rate mortgage on the health club property from
9.625% to 8.25% in May 1996.
Year 2000 Compliance
The Partnership has reviewed its current computer systems and does not
anticipate any future problems relating to the year 2000.
PART II - Other Information
Items 1 through 6 (b) are omitted because of the absence of conditions under
which they are required.
-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: May 15, 1998
/S/ PATRICIA A. CHALLENGER
By: Patricia A. Challenger
Senior Vice President
Date: May 15, 1998
/S/ KELLY TUCEK
By: Kelly Tucek
Principal Financial Officer and
Principal Accounting Officer
Date: May 15, 1998
-12-
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