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, 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 #0-17593
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, 1999 and December 31, 1998
(unaudited)
Assets
------
1999 1998
---- ----
Current assets:
Cash and cash equivalents (Note 1).............. $ 1,426,459 1,161,470
Accounts and rents receivable................... 58,413 162,558
Other assets.................................... 1,635 1,875
------------ ------------
Total current assets.............................. 1,486,507 1,325,903
------------ ------------
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.................... 14,001,371 13,957,812
------------ ------------
17,999,520 17,955,961
Less accumulated depreciation............... 4,372,994 4,047,610
------------ ------------
Net investment properties......................... 13,626,526 13,908,351
------------ ------------
Other assets:
Deferred leasing fees to Affiliates (net of
accumulated amortization of $156,574 and
$143,005 at September 30, 1999 and December 31,
1998, respectively) (Notes 1 and 3)........... 71,158 84,727
Deferred rent receivable (Note 2)............... 238,582 302,419
------------ ------------
Total other assets................................ 309,740 387,146
------------ ------------
Total assets...................................... $15,422,773 15,621,400
============ ============
See accompanying notes to financial statements.
-2-
INLAND MONTHLY INCOME FUND II, L.P.
(a limited partnership)
Balance Sheets
(continued)
September 30, 1999 and December 31, 1998
(unaudited)
Liabilities and Partners' Capital
---------------------------------
1999 1998
---- ----
Current liabilities:
Accounts payable................................ $ 231 3,007
Accrued real estate taxes....................... 243,622 185,785
Distributions payable (Note 4).................. 135,900 140,427
Due to Affiliates (Note 3)...................... 5,650 472
Deposits held for others........................ 631,218 458,203
------------ ------------
Total current liabilities......................... 1,016,621 787,894
Commission payable to Affiliates (Note 3)......... 132,000 132,000
------------ ------------
Total liabilities................................. 1,148,621 919,894
------------ ------------
Partners' capital (Notes 1, 3 and 4):
General Partner:
Capital contribution.......................... 500 500
Cumulative net income......................... 56,723 59,977
------------ ------------
57,223 60,477
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......................... 14,827,055 14,014,261
Cumulative distributions...................... (22,526,636) (21,289,742)
------------ ------------
14,216,929 14,641,029
------------ ------------
Total Partners' capital........................... 14,274,152 14,701,506
------------ ------------
Total liabilities and Partners' capital........... $15,422,773 15,621,400
============ ============
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, 1999 and 1998
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
Income: ---- ---- ---- ----
Rental income (Notes 1 and 2).... $ 489,191 473,076 1,375,243 1,439,314
Additional rental income......... 36,510 41,361 109,810 120,528
Interest income.................. 9,418 10,739 22,761 31,419
Other income..................... - - - 20
---------- ---------- ---------- ----------
535,119 525,176 1,507,814 1,591,281
Expenses: ---------- ---------- ---------- ----------
Professional services to
Affiliates..................... 112 4,186 6,066 9,982
Professional services to
non-affiliates................. 2,811 - 35,766 27,250
General and administrative
expenses to Affiliates......... 8,292 6,739 24,747 17,422
General and administrative
expenses to non-affiliates..... (736) 1,481 15,799 13,045
Property operating expenses to
Affiliates..................... 7,648 7,318 25,750 23,574
Property operating expenses to
non-affiliates................. 54,928 57,183 251,193 182,392
Depreciation..................... 108,704 104,860 325,384 320,654
Amortization..................... 4,523 4,523 13,569 13,570
---------- ---------- ---------- ----------
186,282 186,290 698,274 607,889
---------- ---------- ---------- ----------
Net income......................... $ 348,837 338,886 809,540 983,392
========== ========== ========== ==========
Net income (loss) allocated to:
General Partner.................. (1,087) (1,049) (3,254) (3,207)
Limited Partners................. 349,924 339,935 812,794 986,599
---------- ---------- ---------- ----------
Net income......................... $ 348,837 338,886 809,540 983,392
========== ========== ========== ==========
Net loss allocated to the one
General Partner Unit............. $ (1,087) (1,049) (3,254) (3,207)
========== ========== ========== ==========
Net income per Unit, basic and
diluted, allocated to Limited
Partners per weighted average
Limited Partnership Units of
50,095.50........................ $ 6.99 6.78 16.22 19.69
========== ========== ========== ==========
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, 1999 and 1998
(unaudited)
1999 1998
---- ----
Cash flows from operating activities:
Net income...................................... $ 809,540 983,392
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation.................................. 325,384 320,654
Amortization.................................. 13,569 13,570
Deferred rent receivable...................... 63,837 51,518
Changes in assets and liabilities:
Accounts and rents receivable............... 104,145 (92,926)
Other assets................................ 240 (905)
Accounts payable............................ (2,776) 7,494
Accrued real estate taxes................... 57,837 37,677
Due to Affiliates........................... 5,178 6,549
Other current liabilities................... - (20,332)
------------ ------------
Net cash provided by operating activities......... 1,376,954 1,306,691
------------ ------------
Cash flows from investing activities:
Additions to investment properties.............. (43,559) (53,502)
------------ ------------
Net cash used in investing activities............. (43,559) (53,502)
------------ ------------
Cash flows from financing activities:
Deposits held for others........................ 173,015 168,618
Cash distributions.............................. (1,241,421) (1,241,199)
------------ ------------
Net cash used in financing activities............. (1,068,406) (1,072,581)
------------ ------------
Net increase in cash and cash
equivalents..................................... 264,989 180,608
Cash and cash equivalents at beginning of period.. 1,161,470 1,151,954
------------ ------------
Cash and cash equivalents at end of period........ $ 1,426,459 1,332,562
============ ============
See accompanying notes to financial statements.
-5-
INLAND MONTHLY INCOME FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
September 30, 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
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.
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. The
Partnership has not recognized any such impairment.
A presentation of information about operating segments as required in Statement
of Financial Accounting Standards No. 131 "Disclosures About Segments of an
Enterprise and Related Information" would not be material to an understanding
of the Partnership's business taken as a whole as the Partnership is engaged in
the business of real estate investment which management considers to be a
single operating segment.
-6-
INLAND MONTHLY INCOME FUND II, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
September 30, 1999
(unaudited)
Offering costs have been offset against the Limited Partners' capital accounts.
Depreciation expense is computed using the straight-line method. Depreciation
of buildings and improvements are based upon estimated useful lives of 30 to 40
years, while depreciation of 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. Tenant improvements are
depreciated over the related lease term.
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. Such investments are
carried at cost which approximates market. Cash and cash equivalents are
approximately $1,426,000 and $1,161,000 at September 30, 1999 and December 31,
1998, respectively, of which approximately $525,200 and $446,800, respectively,
is included in cash and cash equivalents and 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 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, 1999
(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 $63,837 and $51,518 for the nine
months ended September 30, 1999 and 1998, respectively, of rental income for
the period of occupancy for which stepped rent increases apply and $238,582 and
$302,419 in related deferred rent receivable as of September 30, 1999 and
December 31, 1998, respectively. These amounts will be collected over the
terms of the related leases as scheduled rent payments are made.
(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 $5,650 and $472 was unpaid as of September 30, 1999 and December 31,
1998, respectively.
An Affiliate of the General Partner earned Property Management Fees of $25,750
and $23,574 for the nine months ended September 30, 1999 and 1998,
respectively, in connection with managing the Partnership's properties. Such
fees are included in property operating expenses to Affiliates, all of which
were paid as of September 30, 1999.
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 1999, 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 "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, 1999, cumulative distributions to Limited Partners totaled $22,526,636, of
which $4,395,565 represents proceeds from the sale of The Wholesale Club and
$18,131,071 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, 1999, the Partnership had cash and cash equivalents of
$1,426,459 which includes approximately $525,200 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,
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, 1999, 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.
On July 26, 1999, the Partnership received and accepted a signed contract for
the sale of Eurofresh Market Plaza for an amount of $2,400,000. The contract
is subject to and contingent upon the purchaser obtaining acceptable financing.
The purchaser has paid $100,000 as earnest money to be applied to the purchase
price and closing is scheduled on or before November 30, 1999.
-9-
Results of Operations
At September 30, 1999, 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 Eurofresh
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.
Rental income decreased for the nine months ended September 30, 1999, as
compared to the nine months ended September 30, 1998, due to a decrease in
occupancy at Eurofresh Market Plaza. Rental income increased for the three
months ended September 30, 1999, as compared to the three months ended
September 30, 1998, due to the receipt of settlement proceeds from a former
tenant of Eurofresh Market. As of September 30, 1999, there were six vacant
spaces at Eurofresh Market Plaza for 11,888 square feet.
Interest income decreased for the three and nine months ended September 30,
1999, as compared to the three and nine months ended September 30, 1998, due to
a decrease in cash available to invest in short-term investments and lower
interest rates.
Professional services to Affiliates decreased for the three and nine months
ended September 30, 1999, as compared to the three and nine months ended
September 30, 1998, due to a decrease in accounting services required which was
partially offset by an increase in legal services required. Professional
services to non-affiliates increased for the three and nine months ended
September 30, 1999, as compared to the three and nine months ended September
30, 1998, due to an increase in legal fees.
General and administrative expenses to Affiliates increased for the three and
nine months ended September 30, 1999, as compared to the three and nine months
ended September 30, 1998, due to an increase in data processing and investor
services expenses. General and administrative expenses to non-affiliates
increased for the nine months ended September 30, 1999, as compared to the nine
months ended September 30, 1998, due to an increase in state taxes. General
and administrative expenses to non-affiliates decreased for the three months
ended September 30, 1999, as compared to the three months ended September 30,
1998, due to account reclassifications.
Property operating expenses to non-affiliates increased for the nine months
ended September 30, 1999, as compared to the nine months ended September 30,
1998, due to an increase in snow removal costs and repairs and maintenance
expenses at Eurofresh Market Plaza.
-10-
The following is a list of approximate occupancy levels for the Partnership's
investment properties as of the end of each quarter during 1998 and 1999:
1998 1999
------------------------ ------------------------
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
Eurofresh Market Plaza 95% 95% 89% 85% 77% 77% 77%
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. 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 ongoing, 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 has evaluated its potential exposure
and costs if such non-information technology systems are not year 2000 compliant
and does not expect any costs or exposure to be material.
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.
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 costs
are not expected to be significant.
-12-
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
-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, 1999
/S/ PATRICIA A. DELROSSO
By: Patricia A. DelRosso
Senior Vice President
Date: November 12, 1999
/S/ KELLY TUCEK
By: Kelly Tucek
Principal Financial Officer and
Principal Accounting Officer
Date: November 12, 1999
-14-
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<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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