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, 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 #0-17593
Inland Monthly Income Fund II, L.P.
(Exact name of registrant as specified in its charter)
Delaware #36-3587209
(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 MONTHLY INCOME FUND II, L.P.
(a limited partnership)
Balance Sheets
September 30, 1998 and December 31, 1997
(unaudited)
Assets
------
1998 1997
---- ----
Current assets:
Cash and cash equivalents (Note 1).............. $ 1,332,562 1,151,954
Accounts and rents receivable................... 263,730 170,804
Current portion of deferred rent receivable
(Note 2)...................................... - 1,103
Other assets.................................... 2,966 2,061
------------ ------------
Total current assets.............................. 1,599,258 1,325,922
------------ ------------
Investment properties (including acquisition fees
paid to Affiliates of $1,430,682)(Notes 1 and 3):
Land.......................................... 3,998,149 3,998,149
Buildings and improvements.................... 13,867,687 13,814,185
------------ ------------
17,865,836 17,812,334
Less accumulated depreciation............... 3,938,519 3,617,865
------------ ------------
Net investment properties......................... 13,927,317 14,194,469
------------ ------------
Other assets:
Deferred leasing fees to Affiliates (net of
accumulated amortization of $138,482 and
$124,912 at September 30, 1998 and December 31,
1997, respectively) (Notes 1 and 3)........... 89,250 102,820
Deferred rent receivable, less current portion
(Note 2)...................................... 299,453 349,868
------------ ------------
Total other assets................................ 388,703 452,688
------------ ------------
Total assets...................................... $15,915,278 15,973,079
============ ============
See accompanying notes to financial statements.
-2-
INLAND MONTHLY INCOME FUND II, L.P.
(a limited partnership)
Balance Sheets
(continued)
September 30, 1998 and December 31, 1997
(unaudited)
Liabilities and Partners' Capital
---------------------------------
1998 1997
---- ----
Current liabilities:
Accounts payable................................ $ 10,202 2,708
Accrued real estate taxes....................... 226,406 188,729
Distributions payable (Note 4).................. 135,900 140,427
Due to Affiliates (Note 3)...................... 8,197 1,648
Deposits held for others........................ 553,066 384,448
Other current liabilities....................... 6,593 26,925
------------ ------------
Total current liabilities......................... 940,364 744,885
Commission payable to Affiliates (Note 3)......... 132,000 132,000
------------ ------------
Total liabilities................................. 1,072,364 876,885
------------ ------------
Partners' capital (Notes 1, 3 and 4):
General Partner:
Capital contribution.......................... 500 500
Cumulative net income......................... 61,067 64,274
------------ ------------
61,567 64,774
Limited Partners: ------------ ------------
Units of $500. Authorized 80,000 Units,
50,095.50 Units outstanding (net of
offering costs of $3,148,734, of which
$653,165 was paid to Affiliates)............ 21,916,510 21,916,510
Cumulative net income......................... 13,737,825 12,751,226
Cumulative distributions...................... (20,872,988) (19,636,316)
------------ ------------
14,781,347 15,031,420
------------ ------------
Total Partners' capital........................... 14,842,914 15,096,194
------------ ------------
Total liabilities and Partners' capital........... $15,915,278 15,973,079
============ ============
See accompanying notes to financial statements.
-3-
INLAND MONTHLY INCOME FUND II, L.P.
(a limited partnership)
Statements of Operations
For the three and nine months ended September 30, 1998 and 1997
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
Income: ---- ---- ---- ----
Rental income (Notes 1 and 2).... $ 473,076 480,653 1,439,314 1,437,430
Additional rental income......... 41,361 41,731 120,528 125,279
Interest income.................. 10,739 9,170 31,419 26,826
Other income..................... - - 20 17,489
---------- ---------- ---------- ----------
525,176 531,554 1,591,281 1,607,024
Expenses: ---------- ---------- ---------- ----------
Professional services to
Affiliates..................... 4,186 3,300 9,982 9,230
Professional services to
non-affiliates................. - - 27,250 27,230
General and administrative
expenses to Affiliates......... 6,739 6,870 17,422 20,368
General and administrative
expenses to non-affiliates..... 1,481 1,567 13,045 14,397
Property operating expenses to
Affiliates..................... 7,318 7,392 23,574 23,703
Property operating expenses to
non-affiliates................. 57,183 90,379 182,392 249,784
Depreciation..................... 104,860 107,897 320,654 323,691
Amortization..................... 4,523 4,524 13,570 13,570
---------- ---------- ---------- ----------
186,290 221,929 607,889 681,973
---------- ---------- ---------- ----------
Net income......................... $ 338,886 309,625 983,392 925,051
========== ========== ========== ==========
Net income (loss) allocated to:
General Partner.................. (1,049) (1,079) (3,207) (3,237)
Limited Partners................. 339,935 310,704 986,599 928,288
---------- ---------- ---------- ----------
Net income......................... $ 338,886 309,625 983,392 925,051
========== ========== ========== ==========
Net loss allocated to the one
General Partner Unit............. $ (1,049) (1,079) (3,207) (3,237)
========== ========== ========== ==========
Net income per Unit, basic and
diluted, allocated to Limited
Partners per weighted average
Limited Partnership Units of
50,095.50........................ $ 6.78 6.20 19.69 18.53
========== ========== ========== ==========
See accompanying notes to financial statements.
-4-
INLAND MONTHLY INCOME FUND II, L.P.
(a limited partnership)
Statements of Cash Flows
For nine months ended September 30, 1998 and 1997
(unaudited)
1998 1997
---- ----
Cash flows from operating activities:
Net income...................................... $ 983,392 925,051
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation.................................. 320,654 323,691
Amortization.................................. 13,570 13,570
Deferred rent receivable...................... 51,518 23,379
Changes in assets and liabilities:
Accounts and rents receivable............... (92,926) (49,198)
Other assets................................ (905) (2,768)
Accounts payable............................ 7,494 (7,953)
Accrued real estate taxes................... 37,677 (42,418)
Due to Affiliates........................... 6,549 7,877
Other current liabilities................... (20,332) -
------------ ------------
Net cash provided by operating activities......... 1,306,691 1,191,231
------------ ------------
Cash flows from investing activities:
Additions to investment properties.............. (53,502) -
------------ ------------
Net cash used in investing activities............. (53,502) -
------------ ------------
Cash flows from financing activities:
Deposits held for others........................ 168,618 (74,390)
Cash distributions.............................. (1,241,199) (1,240,817)
------------ ------------
Net cash used in financing activities............. (1,072,581) (1,315,207)
Net increase (decrease) in cash and cash ------------ ------------
equivalents..................................... 180,608 (123,976)
Cash and cash equivalents at beginning of period.. 1,151,954 1,043,462
------------ ------------
Cash and cash equivalents at end of period........ $ 1,332,562 919,486
============ ============
See accompanying notes to financial statements.
-5-
INLAND MONTHLY INCOME FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
September 30, 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
The Registrant, Inland Monthly Income Fund II, L.P. (the "Partnership"), was
formed on June 20, 1988 pursuant to the Delaware Revised Uniform Limited
Partnership Act, to invest in improved residential, retail, industrial and
other income producing properties. On August 4, 1988, the Partnership commenced
an Offering of 50,000 (subject to increase to 80,000) Limited Partnership Units
pursuant to a Registration under the Securities Act of 1933. The Offering
terminated on August 4, 1990, with total sales of 50,647.14 Units at $500 per
Unit, resulting in gross offering proceeds of $25,323,569, not including the
General Partner's contribution for $500. All of the holders of these Units have
been admitted to the Partnership. Inland Real Estate Investment Corporation is
the General Partner. The Limited Partners of the Partnership share in the
benefits of ownership of the Partnership's real property investments in
proportion to the number of Units held. The Partnership repurchased 551.64
Units for $260,285 from various Limited Partners through the Unit Repurchase
Program. There are no funds remaining for the repurchase of Units through this
program.
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.
Statement of Financial Accounting Standards No. 121 ("SFAS 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, 1998, the Partnership has not recognized any such impairment.
-6-
INLAND MONTHLY INCOME FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
September 30, 1998
(unaudited)
Depreciation expense is computed using the straight-line method. Buildings and
improvements are based upon estimated useful lives of 30 to 40 years, while
furniture and fixtures are based upon estimated useful lives of 5 to 12 years.
Maintenance and repair expenses are charged to operations as incurred.
Significant improvements are capitalized and depreciated over their estimated
useful lives.
Deferred leasing fees are amortized on a straight-line basis over the term of
the related lease.
Rental income is recognized on a straight-line basis over the term of each
lease. The difference between rental income earned on the straight-line basis
and the cash rent due under the provisions of the lease agreements is recorded
as deferred rent receivable.
The Partnership considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents and are carried at
cost, which approximates market. For the periods ended September 30, 1998 and
December 31, 1997, included in cash and cash equivalents is approximately
$541,700 and $372,200, respectively, held in an unrestricted escrow account for
the payment of real estate taxes for Colonial Manor Living Center.
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.
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 for the periods
presented herein. Results of interim periods are not necessarily indicative of
the results to be expected for the year.
-7-
INLAND MONTHLY INCOME FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
September 30, 1998
(unaudited)
(2) Deferred Rent Receivable
Certain tenant leases contain provisions providing for stepped rent increases.
Generally accepted accounting principles require that rental income be recorded
for the period of occupancy using the straight-line basis. The accompanying
financial statements include decreases of $51,518 and $23,379 for the nine
months ended September 30, 1998 and 1997, respectively, of rental income for
the period of occupancy for which stepped rent increases apply and $299,453 and
$350,971 in related deferred rent receivable as of September 30, 1998 and
December 31, 1997, respectively. These amounts will be collected over the
terms of the related leases as scheduled rent payments are made. Deferred rent
receivable of $3,719 was written off against rental income for the year ended
December 31, 1997, due to two tenants vacating at Euro-Fresh Market Plaza.
(3) 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. Such costs are included in
professional services and general and administrative expenses to Affiliates, of
which $8,197 and $1,648 was unpaid as of September 30, 1998 and December 31,
1997, respectively.
An Affiliate of the General Partner earned Property Management Fees of $23,574
and $23,703 for the nine months ended September 30, 1998 and 1997,
respectively, in connection with managing the Partnership's properties. Such
fees are included in property operating expenses to Affiliates, all of which
was paid as of September 30, 1998.
In connection with the sale of The Wholesale Club on January 8, 1991, the
Partnership recorded $132,000 of sales commission payable to an Affiliate of
the General Partner. Such commission has been deferred until the Limited
Partners receive their Original Capital plus a return as specified in the
Partnership Agreement.
(4) Subsequent Events
During October 1998, the Partnership paid a distribution of $135,900 to the
Limited Partners.
-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 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 August 4, 1988, the Partnership commenced an Offering of 50,000 (subject to
increase to 80,000) Limited Partnership Units pursuant to a Registration
Statement on Form S-11 under the Securities Act of 1933. The Offering
terminated on August 4, 1990, with total sales of 50,647.14 Units at $500 per
Unit, resulting in gross offering proceeds of $25,323,569, not including the
General Partner's contribution of $500. All of the holders of these Units have
been admitted to the Partnership. The Partnership has acquired five properties
utilizing $21,224,542 of capital proceeds collected. On January 8, 1991, the
Partnership sold one of its properties, The Wholesale Club. As of September
30, 1998, cumulative distributions to Limited Partners totaled $20,872,988, of
which $4,395,565 represents proceeds from the sale of The Wholesale Club and
$16,477,423 represents distributable cash flow from the properties. The
Partnership repurchased 551.64 Units for $260,285 from various Limited Partners
through the Unit Repurchase Program. There are no funds remaining for the
repurchase of Units through this program.
As of September 30, 1998, the Partnership had cash and cash equivalents of
$1,332,562 which includes approximately $541,700 held in an unrestricted escrow
account for the payment of real estate taxes for Colonial Manor Living Center.
The Partnership intends to use such remaining funds for property upgrades,
including reroofing at Euro-Fresh Market Plaza, distributions and for other
working capital requirements.
The properties owned by the Partnership are generating cash flow in excess of
the 8% annualized distributions to the Limited Partners (paid monthly), in
addition to covering all the operating expenses of the Partnership. As of
September 30, 1998, the Partnership has made cumulative distributions of
$253,868 in addition to the 8% annualized return to the Limited Partners from
excess cash flow. To the extent that the cash flow from the properties 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 one or more of the properties.
-9-
Results of Operations
At September 30, 1998, the Partnership owns four operating properties. Two of
the Partnership's four operating properties, Scandinavian Health Spa and
Colonial Manor Living Center, are leased on a "triple-net" basis which means
that all expenses of the property are passed through to the tenant. The leases
of the other two properties owned by the Partnership, K mart and Euro-Fresh
Market Plaza, provide that the Partnership be responsible for maintenance of
the structure and the parking lot and the tenants are required to reimburse the
Partnership for portions of insurance, real estate taxes and common area
maintenance. The Partnership sold one of its properties, The Wholesale Club,
on January 8, 1991.
Rental income for the nine months ended September 30, 1998, was relatively
comparable to the nine months ended September 30, 1997. As of September 30,
1998, there were four vacant spaces at Euro-Fresh Market Plaza for 5,764 square
feet.
Interest income increased for the three and nine months ended September 30,
1998, as compared to the three and nine months ended September 30, 1997, due to
an increase in cash available to invest in short-term investments.
The other income recorded for the nine months ended September 30, 1997 is the
result of the Partnership receiving miscellaneous receipts relating to the
Colonial Manor Living Center.
General and administrative expenses to Affiliates decreased for the three and
nine months ended September 30, 1998, as compared to the three and nine months
ended September 30, 1997, due to a decrease in investor service expenses.
Property operating expenses to non-affiliates decreased for the three and nine
months ended September 30, 1998, as compared to the three and nine months ended
September 30, 1997, due to decreases in repair and maintenance, other
professional services, and real estate taxes at Euro-Fresh Market Plaza. This
decrease was partially offset by increases in common area maintenance and legal
expenses at the property.
-10-
The following is a list of approximate occupancy levels for the Partnership's
investment properties as of the end of each quarter during 1997 and 1998:
1997 1998
------------------------ ------------------------
at at at at at at at at
Properties 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
---------- ---- ---- ---- ---- ---- ---- ---- -----
Scandinavian Health Spa 100% 100% 100% 100% 100% 100% 100%
Broadview Heights, Ohio
Colonial Manor 100% 100% 100% 100% 100% 100% 100%
LaGrange, Illinois
K mart 100% 100% 100% 100% 100% 100% 100%
Chandler, Arizona
Euro-Fresh Market Plaza 93% 98% 98% 95% 95% 95% 89%
Palatine, Illinois
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.
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.
-11-
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. 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 due to year 2000 non-
compliance by any of the Partnership's tenants or suppliers.
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.
YEAR 2000 COSTS
The Partnership's General Partner and its Affiliates estimate that costs to
achieve year 2000 compliance will not exceed $50,000. 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 incurred through September 30, 1998 are estimated at
approximately $5,000.
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 some of the Partnership's properties.
CONTINGENCY PLAN
The Partnership is in the process of formulating a contingency plan which will
be developed by July of 1999.
-12-
PART II - Other Information
Items 1 through 6(b) are omitted because of the absence of conditions under
which they are required.
Item 7. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None
-13-
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 MONTHLY INCOME FUND II, L.P.
By: Inland Real Estate Investment Corporation
General Partner
/S/ ROBERT D. PARKS
By: Robert D. Parks
Chairman
Date: November 12, 1998
/S/ PATRICIA A. CHALLENGER
By: Patricia A. Challenger
Senior Vice President
Date: November 12, 1998
/S/ KELLY TUCEK
By: Kelly Tucek
Principal Financial Officer and
Principal Accounting Officer
Date: November 12, 1998
-14-
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