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, 1999
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, 1999 and December 31, 1998
(unaudited)
Assets
------
1999 1998
---- ----
Current assets:
Cash and cash equivalents including amounts
held by property manager (Note 1)............. $ 223,316 185,913
Accrued interest receivable..................... 100 202
------------ ------------
Total current assets.......................... 223,416 186,115
------------ ------------
Property held for sale (Note 1).................. 1,187,723 1,187,723
Accrued rents receivable (Notes l and 3).......... 44,161 48,074
Deferred loan costs (net of accumulated
amortization of $22,468 and $21,522 at March 31,
1999 and December 31, 1998, respectively)
(Note 1)........................................ - 946
Deferred leasing fees to Affiliates (net of
accumulated amortization of $19,322 and $18,656
at March 31, 1999 and December 31, 1998,
respectively) (Note 1).......................... 6,663 7,329
------------ ------------
Total assets...................................... $ 1,461,963 1,430,187
============ ============
See accompanying notes to financial statements.
-2-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Balance Sheets
(continued)
March 31, 1999 and December 31, 1998
(unaudited)
Liabilities and Partners' Capital
---------------------------------
1999 1998
Current liabilities: ---- ----
Accounts payable and accrued expenses........... $ 6,436 -
Current portion of long-term debt (Note 4)...... - 780,288
Note payable to Affiliate (Note 4).............. 786,081 -
Accrued interest payable........................ 11,867 -
Due to Affiliates (Note 2)...................... 1,516 360
------------ ------------
Total current liabilities..................... 805,900 780,648
------------ ------------
Commission payable to Affiliates (Note 2)......... 135,000 135,000
Total liabilities............................. 940,900 915,648
------------ ------------
Partners' capital (Notes 1 and 2):
General Partner:
Capital contribution.......................... 500 500
Cumulative net income......................... 16,434 16,369
Cumulative cash distributions................. (9,939) (9,939)
------------ ------------
6,995 6,930
Limited Partners: ------------ ------------
Units of $1,000. Authorized 25,000 Units,
4,004.25 Units outstanding at March 31, 1999
and December 31, 1998 (net of offering
costs of $462,849, of which $59,476 was
paid to Affiliates)......................... 3,541,408 3,541,408
Cumulative net income......................... 1,627,072 1,620,613
Cumulative cash distributions................. (4,654,412) (4,654,412)
------------ ------------
514,068 507,609
------------ ------------
Total Partners' capital..................... 521,063 514,539
------------ ------------
Total liabilities and Partners' capital........... $ 1,461,963 1,430,187
============ ============
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, 1999 and 1998
(unaudited)
1999 1998
Income: ---- ----
Rental income (Note 3).......................... $ 51,661 51,661
Interest income................................. 2,291 3,280
------------ ------------
53,952 54,941
------------ ------------
Expenses:
Professional services to Affiliates............. 419 966
Professional services to non-affiliates......... 14,000 16,900
General and administrative expenses to
Affiliates.................................... 6,194 5,464
General and administrative expenses to
non-affiliates................................ 7,237 1,096
Property operating expenses to Affiliates....... 556 556
Mortgage interest to Affiliates................. 11,867 -
Mortgage interest to non-affiliates............. 5,543 17,349
Depreciation.................................... - 9,141
Amortization.................................... 1,612 3,506
------------ ------------
47,428 54,977
------------ ------------
Net income (loss)................................. $ 6,524 (37)
============ ============
Net income (loss) allocated to:
General Partner................................. 65 -
Limited Partners................................ 6,459 (37)
------------ ------------
Net income (loss)................................. $ 6,524 (37)
============ ============
Net income (loss) allocated to the one General
Partner Unit.................................... $ 65 -
============ ============
Net income (loss) per 4,004.25 weighted average
Limited Partnership Units....................... $ 1.61 (.01)
============ ============
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, 1999 and 1998
(unaudited)
1999 1998
Cash flows from operating activities: ---- ----
Net income (loss)............................... $ 6,524 (37)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation.................................. - 9,141
Amortization.................................. 1,612 3,506
Changes in assets and liabilities:
Accrued rents receivable.................... 3,913 3,912
Accrued interest receivable................. 102 208
Accounts payable and accrued expenses....... 6,436 6,608
Accrued interest payable.................... 11,867 (5,856)
Due to Affiliates........................... 1,156 3,022
------------ ------------
Net cash provided by operating activities......... 31,610 20,504
------------ ------------
Cash flows from financing activities:
Proceeds from note payable to Affiliate......... 786,081 -
Pay-off of long-term debt....................... (780,288) -
Principal payments of long-term debt............ - (21,316)
Distributions................................... - (25,559)
Net cash provided by (used in) financing ------------ ------------
activities...................................... 5,793 (46,875)
------------ ------------
Net increase (decrease) in
cash and cash equivalents....................... 37,403 (26,371)
Cash and cash equivalents at beginning of period.. 185,913 128,545
------------ ------------
Cash and cash equivalents at end of period........ $ 223,316 102,174
============ ============
Supplemental disclosure of cash flow information:
Cash paid for mortgage and other interest....... $ 5,543 23,205
============ ============
See accompanying notes to financial statements.
-5-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
March 31, 1999
(unaudited)
Readers of this Quarterly Report should refer to the Partnership's audited
financial statements for the fiscal year ended December 31, 1998, which are
included in the Partnership's 1998 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,
1999, the Partnership has repurchased a total of 34 Units ($33,993) from
various Limited Partners. At March 31, 1999, included in cash and cash
equivalents, is approximately $15,000 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.
-6-
INLAND REAL ESTATE GROWTH FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
March 31, 1999
(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. The Partnership's policy is to
consider a property to be held for sale or disposition when the Partnership has
committed to sell such property and active marketing activity has commenced.
Effective September 23, 1998, the Partnership's investment property was held
for sale and the Partnership listed and was actively marketing the Scandinavian
Health Club property for sale at an amount in excess of its carrying value. The
property is scheduled to be included in a sealed bid auction in June 1999. In
accordance with SFAS 121, any property identified as "held for sale or
disposition" is no longer depreciated. Adjustments for impairment loss for
such a property are made in each period as necessary to report the property at
the lower of carrying value or fair value less cost to sell. As of March 31,
1999, 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 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, 1999
(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 $1,516 and $360
remained unpaid at March 31, 1999 and December 31, 1998, respectively.
In connection with the sales at Wellington Place apartment complex during 1991,
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, 1999 and 1998, have been incurred and paid to an
Affiliate and are included in the Partnership's property operating expenses to
Affiliates.
(3) 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 $3,913 in
both 1999 and 1998, of rental income for the period of occupancy for which
stepped rent increases apply and $44,161 and $48,074 in related accounts
receivable as of March 31, 1999 and December 31, 1998, respectively. Those
amounts are expected to be collected over the terms of the related leases as
scheduled rent payments are made.
(4) Note Payable to Affiliate
As of February 1, 1999, the General Partner of the Partnership advanced funds
on a short-term basis to the Partnership to pay off its mortgage payable
balance of $780,288 plus accrued interest through the maturity date. The note
payable to the General Partner of $786,081 has a current interest rate of 9.5%
and requires monthly interest only payments. A final balloon payment of all
outstanding principal and all accrued and unpaid interest, if any, is due on
December 31, 1999. This note may be extended at the Partnership's option.
-8-
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 "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, 1999, the Partnership has repurchased 34 Units ($33,993) from various
Limited Partners through the Unit Repurchase Program.
At March 31, 1999, the Partnership had cash and cash equivalents of $223,316,
which includes approximately $15,000 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's property is generating sufficient cash flow to cover
operating expenses and debt service. To the extent that this source is
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.
-9-
Results of Operations
As of September 23, 1998, the Partnership listed and was actively marketing the
Scandinavian Health Club property for sale at an amount in excess of its
carrying value. The listing agreement expired on January 31, 1999, however,
the property is scheduled to be included in a sealed bid auction in June 1999.
The Partnership ceased depreciation as of September 23, 1998.
The increase in mortgage interest to Affiliates and the decrease in mortgage
interest to non-affiliates for the three months ended March 31, 1999, as
compared to the three months ended March 31, 1998, is the result of the
refinancing of the mortgage payable. As of February 1, 1999, the General
Partner of the Partnership advanced funds on a short-term basis to the
Partnership to pay off its mortgage payable balance of $780,288 plus accrued
interest through the maturity date. The note payable to the General Partner of
$786,081 has a current interest rate of 9.5% and requires monthly interest only
payments. A final balloon payment of all outstanding principal and all accrued
and unpaid interest, if any, is due on December 31, 1999. This note may be
extended at the Partnership's option.
The decrease in interest income for the three months ended March 31, 1999, as
compared to the three months ended March 31, 1998, is due to a decrease in
interest income received on the installment contract receivables which were
paid off as of June 30, 1998. The decrease in interest income was partially
offset by an increase in investment interest income as more cash was available
for investment as of March 31, 1999, as compared to March 31, 1998.
The decrease in professional services to non-affiliates for the three months
ended March 31, 1999, as compared to the three months ended March 31, 1998, is
due to a decrease in accounting services required by the Partnership.
The increase in general and administrative expenses to non-affiliates for the
three months ended March 31, 1999, as compared to the three months ended March
31, 1998, is due to an increase in state taxes.
Year 2000 Issues
GENERAL
- -------
Many computer operating systems and software applications were designed such
that the year 1999 is the maximum date that can be processed accurately. In
conducting business, the Partnership relies on computers and operating systems
provided by equipment manufacturers, and also on application software developed
internally and, to a limited extent, by outside software vendors. The
Partnership has assessed its vulnerability to the so-called "Year-2000 Issue"
with respect to its equipment and computer systems.
-10-
STATE OF READINESS
- ------------------
The Partnership has identified the following three areas for "Year-2000"
compliance efforts:
Business Computer Systems: The majority of the Partnership's information
technology systems were developed internally and include accounting, lease
management, investment portfolio tracking, and tax return preparation. The
Partnership has rights to the source code for these applications and employs
programmers who are knowledgeable regarding these systems. The process of
testing these internal systems to determine year 2000 compliance is nearly
complete. The Partnership does not anticipate any material costs relating to
its business computer systems regarding year 2000 compliance since the
Partnership's critical hardware and software systems use four digits to
represent the applicable year. The Partnership does use various computers, so-
called "PC's", that may run software that may not use four digits to represent
the applicable year. The Partnership is in the process of testing the PC
hardware and software to determine year 2000 compliance, but it must be noted
that such PC's are incidental to the Partnership's critical systems. The
Partnership is considering independent testing of its critical systems.
Tenants and Suppliers: The Partnership is in the process of surveying tenants,
suppliers and other parties with whom the Partnership does a significant amount
of business to identify the Partnership's potential exposure in the event such
parties are not year 2000 compliant in a timely manner. At this time, the
Partnership is not aware of any party that is anticipating a material Year 2000
compliance issue. However, since this area involves some parties over which
the Partnership has no control, such as public utility companies, it is
difficult, at best, to judge the status of the outside companies' year 2000
compliance. The Partnership is working closely with all suppliers of goods and
services in an effort to minimize the impact of the failure of any supplier to
become year 2000 compliant by December 31, 1999. The Partnership's
investigations and assessments of possible year 2000 issues are in a
preliminary stage, and currently the Partnership is not aware of any material
impact on its business, operations or financial condition even if one or more
parties is not Year 2000 compliant in a timely manner, due to the number and
nature of the Partnership's diverse tenant base.
Non-Information Technology Systems: In the operation of its properties, the
Partnership has acquired equipment with embedded technology such as
microcontrollers, which operate heating, ventilation, and air conditioning
systems, fire alarms, security systems, telephones and other equipment
utilizing time-sensitive technology. The Partnership is in the process of
evaluating its potential exposure and costs if such non-information technology
systems are not year 2000 compliant and expects to be able to complete its
assessment during the second quarter of 1999.
-11-
YEAR 2000 RISKS
- ---------------
The most reasonable likely worst case scenario for the Partnership with respect
to the year 2000 non-compliance of its business computer systems would be the
inability to access information which could result in the failure to issue
financial reports. The most reasonable likely worst case scenario for the
Partnership with respect to the year 2000 non-compliance of its tenants is
failure to receive rental income which could result in the Partnership being
unable to meet cash requirements for monthly expenses. The most reasonable
likely worst case scenario for the Partnership with respect to the year 2000
non-compliance of its suppliers is the failure to supply necessary utilities;
including, but not limited to heating, as a result of a malfunctioning of non-
information technology systems in the Partnership's property.
YEAR 2000 COSTS
- ---------------
The Partnership's General Partner and its Affiliates estimate that costs to
achieve year 2000 compliance will not exceed $100,000. However, only
approximately 1% of these costs will be directly allocated to and paid by the
Partnership. The balance of the year 2000 compliance costs, approximately 99%,
will be paid by the General Partner and its Affiliates. Total year 2000
compliance costs are not expected to be significant.
CONTINGENCY PLAN
- ----------------
The Partnership expects to be Year 2000 compliant in advance of the year 2000.
The Partnership will continue to monitor its progress and state of readiness,
and is in the process of formulating a contingency plan which the Partnership
will be prepared to adopt with respect to areas in which evidence arises that
it may not become Year 2000 compliant in sufficient time. With respect to its
tenants, suppliers and other parties with whom the Partnership conducts
business, the Partnership does not yet have sufficient information to identify
the types of problems it may encounter in the event these third parties are not
Year 2000 compliant. As information is obtained that may indicate such parties
may not become Year 2000 compliant in sufficient time, the Partnership is
prepared to develop contingency plans, accordingly.
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
-12-
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 13, 1999
/S/ PATRICIA A. CHALLENGER
By: Patricia A. Challenger
Senior Vice President
Date: May 13, 1999
/S/ KELLY TUCEK
By: Kelly Tucek
Principal Financial Officer and
Principal Accounting Officer
Date: May 13, 1999
-13-
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