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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly Period ended March 31, 1999
Commission File No. 0-19963
TMP INLAND EMPIRE II, LTD.
A CALIFORNIA LIMITED PARTNERSHIP
(Name of small business issuer as specified in its charter)
CALIFORNIA 33-0311624
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
801 North Parkcenter Drive, Suite 235 92705
Santa Ana, California
(Address of principal executive offices, including Zip Code)
(714) 836-5503
(Issuer's telephone number, including area code)
Check whether the issuer [1] filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Transitional Small Business Disclosure Format: ____Yes__X__No
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following Financial Statements are filed as a part of this form
10-QSB:
Balance Sheets as of March 31, 1999 and December 31, 1998, Statements
of Income for the three months ended March 31, 1999 and 1998, and
Statements of Cash Flows for the three months ended March 31, 1999 and
1998.
The interim financial statements presented have been prepared by the
Partnership without audit and, in the opinion of the management,
reflect all adjustments of a normal recurring nature necessary for a
fair statement of (a) the results of operations for the three months
ended March 31, 1999 and 1998, (b) the financial position at March 31,
1999 and (c) the cash flows for the three month ended March 31, 1999
and 1998. Interim results are not necessarily indicative of results for
a full year.
The balance sheet presented as of December 31, 1998 has been derived
from the financial statements that have been audited by the
Partnership's independent public accountants. The financial statements
and notes are condensed as permitted by Form 10-QSB and do not contain
certain information included in the annual financial statements and
notes of the Partnership. The financial statements and notes included
herein should be read in conjunction with the financial statements and
notes included in the Partnership's Form 10-KSB.
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<TABLE>
<CAPTION>
TMP INLAND EMPIRE II, LTD.
A California Limited Partnership
Balance Sheets
March 31, December 31,
1999 1998
(unaudited)
---------- ------------
<S> <C> <C>
Assets
Cash $ 4,559 $ 375
Prepaid Expenses 6,880
Investment In Unimproved Land, net (Note 1) 1,030,391 1,027,135
--------- ---------
Total Assets $ 1,034,950 $1,034,390
Liabilities and Partners' Capital
Due to Affiliates (Note 5) $ 80,298 $ 71,038
Commission Payable to Affiliate (Note 6) 90,000 90,000
Property Taxes Payable 1,560 ---
Franchise Tax Payable 800 800
--------- ---------
Total Liabilities 172,658 161,838
--------- ---------
General Partners (55,960) (55,857)
Limited Partners; 7,250 Equity Units
Authorized and Outstanding 918,252 928,409
--------- ---------
Total Partners Capital 862,292 872,552
--------- ---------
Total Liabilities and Partners' Capital $ 1,034,950 $1,034,390
========= ==========
</TABLE>
See Accompanying Notes to Financial Statements
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<TABLE>
<CAPTION>
TMP INLAND EMPIRE II, LTD.
A California Limited Partnership
Statements of Income
(Unaudited)
Three Months Ended
March 31 March 31
1999 1998
---------------------------
Income
<S> <C> <C>
Interest $ --- $ 3
-------- -------
Total Income --- $ 3
Expenses
Accounting & Financial Reporting $ 2,454 $ 1,961
Outside Professional Services 2,135 ---
General & Administrative 2,686 992
Interest 2,185 ---
-------- -------
Total Expenses 9,460 2,953
-------- -------
Loss Before Income Taxes 9,460 2,950
State Franchise Tax 800 800
-------- -------
Net Loss $ 10,260 $ 3,750
========= ========
Allocation of Net Loss (Note 4)
General Partners, in the Aggregate $ (103) $ (38)
========= ========
Limited Partners, in the Aggregate $ (10,157) $ (3,712)
========= ========
Limited Partners, per Equity Unit $ (1.40) $ (.51)
========= ========
</TABLE>
See Accompanying Notes to Financial Statements
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<TABLE>
<CAPTION>
TMP INLAND EMPIRE II, LTD.
A California Limited Partnership
Statement of Cash Flows
(Unaudited)
Three Months Ended
March 31 March 31
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(10,260) $ (3,750)
Adjustments to Reconcile Net Loss
To Net Cash Provided By Operating Activities:
Increase in Due to Affiliates 9,260 4,504
Increase in Property Taxes Payable 1,560 ---
Decrease in Prepaid Expenses 6,880 ---
----- ------
Net Cash Provided By
Operating Activities 7,440 754
----- ------
Cash Flow from Investing Activities:
Increase in Investment in Unimproved Land (3,256) (2,708)
------- -------
Net Cash Used In Investing Activities (3,256) (2,708)
------- --------
Net Increase (Decrease) In Cash 4,184 (1,954)
Cash, Beginning of Period 375 2,004
------- -------
Cash, End of Period $ 4,559 $ 50
====== ======
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Taxes $ 800 $ 800
======= =======
Cash Paid for Interest $ -- $ --
======= =========
Other Disclosures:
See Note 6 for information on the Partnerships' non-cash financing activities
during the periods ended March 31, 1999 and 1998.
See Accompanying Notes to Financial Statements
</TABLE>
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TMP INLAND EMPIRE II, LTD
a California Limited Partnership
Notes to the Financial Statements
For the Three Months Ended March 31, 1999
(Unaudited)
Note 1 - General and Summary of Significant Accounting Policies
General - TMP Inland Empire II, Ltd. (the Partnership) was organized in 1988 in
accordance with the provisions of the California Uniform Limited Partnership Act
for the purpose of acquiring, developing and operating real property in the
Inland Empire area of Southern California
Accounting Method - The Partnership's policy is to prepare its financial
statements on the accrual basis of accounting.
Investment in Unimproved Land - Investment in unimproved land is stated at the
lower of cost or fair value. All costs associated with the acquisition of a
property are capitalized. Additionally, the Partnership capitalizes all direct
carrying costs (such as interest and property taxes). These costs are added to
the cost of the properties and are deducted from the sales prices to determine
gains when properties are sold.
Syndication Costs - Syndication costs (such as commissions, printing, and legal
fees) totaling $791,514 represent costs incurred to raise capital and,
accordingly, are recorded as a reduction in partners' capital (see Note 3).
Use of Estimates - 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
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Concentration - All unimproved land parcels held for investment are located in
the Inland Empire area of Southern California. The eventual sales price of all
parcels is highly dependent on the real estate market condition in that
geographical area. The Partnership attempts to mitigate any potential risk by
continually monitoring the market conditions and holding the land parcels
through any periods of declining market conditions.
Income Taxes - The Partnership is treated as a general and limited partnership
for income tax purposes and accordingly any income or loss is passed through and
taxable to the individual partners. Accordingly, there is no provision for
federal income taxes in the accompanying financial statements. However, the
minimum California Franchise Tax payable annually by the Partnership is $800.
New Accounting Standards - In June 1998 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The new statement requires all
derivatives to be recorded on the balance sheet at fair value and establishes
new accounting rules for hedging instruments. This statement will have no effect
on the financial statements of the Partnership.
Note 2 - Organization of the Partnership
On July 26, 1988, the Partnership was formed with TMP Properties (A California
General Partnership) and TMP Investments, Inc. (A California Corporation) as the
general partners. The partners' of TMP Properties are William O. Passo, Anthony
W. Thompson and Scott E. McDaniel. William O. Passo and Anthony W. Thompson were
the shareholders of TMP Investments, Inc. until October 1, 1995, when they sold
their shares to TMP Group, Inc. and then became the shareholders of TMP Group,
Inc.
The Partnership originally acquired three separate parcels of real property in
San Bernardino County, California. The properties were to be held for
investment, appreciation, and ultimate sale and/or improvement of all or portion
thereof, either alone or in conjunction with a joint venture partner. Two of the
three properties were sold in 1989.
The partnership agreement provides for two types of investments: Individual
Retirement Accounts (IRA) and others. The IRA minimum purchase requirement was
$2,000 and all others were a minimum purchase requirement of $5,000. The maximum
liability of the limited partners is the amount of their capital contribution.
Note 3 - Partners' Contributions
The Partnership offered for sale 7,250 units at $1,000 each to qualified
investors. As of December 31, 1989, all 7,250 units had been sold for total
limited partner contributions of $7,250,000. There have been no contributions
made by the general partners. As described in Note 1, syndication costs have
been recorded as a reduction in partners' capital.
Note 4 - Allocation of Profits, Losses and Cash Distributions
Profits, losses, and cash distributions are allocated 99 percent to the limited
partners and 1 percent to the general partners until the limited partners have
received an amount equal to their capital contributions plus a cumulative,
non-compounded return of 6 percent per annum based on their adjusted capital
account balances. At that point, remaining profits, losses and cash
distributions are allocated 85 percent to the limited partners and 15 percent to
the general partners. There were no distributions in 1999 or 1998.
Note 5 - Agreements with PacWest
In March 1998, the general partners of the Partnership entered into an agreement
(the Financing Agreement) with PacWest Inland Empire, LLC (PacWest), a Delaware
Limited Liability company, whereby PacWest paid a total of $300,000 to the
general partners of the Partnership and ten other related partnerships (the TMP
Land Partnerships). In addition, PacWest agreed to pay up to an additional
$300,000 for any deficit capital accounts for these 11 partnerships in exchange
for the rights to distributions from the general partners; referred to as a
"distribution fee" as defined by the Financing Agreement.
Pursuant to a management, administrative, and consulting agreement (the
Management Agreement), PacWest has acquired the general partners' unsubordinated
1% interest in the Partnership and assumed responsibility for all partnership
administration while not replacing any of the General partners.
In addition, PacWest agreed to loan and/or secure a loan for the Partnership the
TMP Land Partnerships in the amount of $2,500,000. Loan proceeds will be
allocated among the 11 TMP Land Partnerships, based on partnership needs, from
recommendations made by PacWest, and under the approval and/or direction of the
general partners. Portions of these funds were loaned to the Partnership at 12%
simple interest over a 24-month period beginning April 1, 1998. The borrowings
are secured by the Partnership's properties, and funds will be loaned, as
needed, in the opinion of the general partners. These funds are not to exceed
50% of the 1997 appraised value of the properties, and will primarily be used to
pay for on-going property maintenance, pay down existing debt, back property
taxes and appropriate entitlement costs.
PacWest, can, at their option, make additional advances with the agreement of
the general partners; however, the aggregate amount of cash loaned to the TMP
Land Partnerships is limited to a maximum of $2,500,000.
In April 1998, PacWest entered into the Management Agreement with the general
partners of the Partnership to provide the Partnership with overall management,
administrative and consulting services. PacWest currently contracts with third
party service providers to perform certain of the financial, accounting, and
investor relations' services for the Partnership. PacWest will charge a fee for
its administrative services equal to an amount not to exceed the average
reimbursements to the general partners for such services over the past five
years. As of March 31, 1999, the Partnership has an amount due of approximately
$76,000 to PacWest related to the aforementioned agreements.
Note 6 - Related Party Transactions
Syndication costs (see Notes 1 and 3) netted against partners' capital
contributions include $725,000 of selling commissions paid in prior years to TMP
Capital Corp. for the sale of partnership units of which a portion was then paid
to unrelated registered representatives. William O. Passo and Anthony W.
Thompson were the shareholders of TMP Capital Corp. until October 1, 1995, when
they sold their shares to TMP Group, Inc.
Investment in unimproved land includes acquisition fees of $198,874 paid in
prior years to TMP Properties, TMP Investments, Inc., and the general partners,
for services rendered in connection with the acquisition of the properties.
The general partners and an affiliated company of the general partner for
office, secretarial and advertising expenses, charged the Partnership $9,790
during the year ended December 31, 1997. As of March 31, 1999 the Partnership
had a payable of approximately $4,000 to the general partner and the affiliated
company.
At March 31, 1999, $90,000 is payable to Regal Realty, a company wholly owned by
Scott E. McDaniel, for services rendered relating to sales of properties prior
to 1990. Mr. McDaniel is a partner of TMP Properties and he was a shareholder of
TMP Investments, Inc. until September 1993 when he sold his shares to Mr. Passo
and Mr. Thompson. Ultimate payment of this amount is contingent on the limited
partners receiving an amount equal to their capital contributions plus a
cumulative, non-compounded return of 6% per annum on their adjusted capital
contributions. As of March 31, 1999 the limited partners had not received such a
return and therefore this amount is not currently due.
See Note 5 regarding information on management of the Partnership during 1999.
Note 7 - - Restatement and Reissuance of 1997 financial statements
In compliance with Statement of Financial Accounting Standards No. 121
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of (SFAS 121), the 1996 financial statements reported an expense for
the decline in fair value of unimproved land of $2,659,615. The 1997 financial
statements originally issued with the auditor's report dated January 28, 1998
reported $1,692,884 of income due to appreciation in fair value of land. SFAS
121 does not provide for recording appreciation in fair value of an asset even
in view of previously recording a decline in value. Therefore, the 1997
financial statements were restated to reverse the appreciation in fair value of
land on August 3, 1998 by the predecessor accounting firm.
Note 8 - Year 2000 Issue (unaudited)
Like other organizations and individuals around the world, the Partnership could
be adversely affected if the computer systems it uses and those used by the
Partnerships' major customers and vendors do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Issue." Management is assessing its computer
systems and the systems compliance issues of its major service providers. Based
on information available to management, the Partnership's major customers and
vendors are taking steps that they believe are reasonably designed to address
the Year 2000 Issue with respect to computer systems that they use. At this
time, however, there can be no assurance that these steps will be sufficient,
and the failure of a timely completion of all necessary procedures could have a
material adverse effect on the Partnership's operations. Management will
continue to monitor the status of, and its exposure to, this issue.
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TMP INLAND EMPIRE II, LTD.
a California Limited Partnership
For the Three Months Ended March 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis provides information that the
Partnership's management believes is relevant to an assessment and understanding
of the Partnership's results of operations and financial condition. This
discussion should be read in conjunction with the financial statements and
footnotes, which appear elsewhere in this report.
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are subject to the "safe harbor" created
by that section. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions or variations of such
words are intended to identify forward-looking statements, but are not the
exclusive means of identifying forward-looking statements in this report.
Additionally, statements concerning future matters such as the features,
benefits and advantages of the Partnership's property regarding matters that are
not historical are forward-looking statements. Such statements are subject to
certain risks and uncertainties, including without limitation those discussed in
"Risk Factors" sections of this report. The Partnership's actual future results
could differ materially from those projected in the forward-looking statements.
The Partnership assumes no obligation to update the forward-looking statements.
Readers are urged to review and consider carefully the various disclosures made
by the Partnership in this report, which attempts to advise interested parties
of the risks and factors that may affect the Partnership's business, financial
condition and results of operations.
Results of Operations
The following discussion should be read in conjunction with the attached
financial statements and notes thereto and with the Partnership's audited
financial statements and notes thereto for the fiscal year ended December 31,
1998.
During the period from inception through December 31, 1988, the Partnership was
engaged primarily in the sale of Units of Limited Partnership Interest and the
investment of the subscription proceeds to purchase parcels of unimproved real
property. The Partnership sold two properties during 1989 for a gross profit,
net of acquisition, carrying and selling costs, of $1,028,844. Other revenues
received during, 1994-1998 consisted primarily of interest income earned on
funds held and income from the forfeiture of nonrefundable deposits.
The Partnership recognized losses in 1995 and 1996 due to the write-down in
value of the Partnership land. The decline in land value was due mainly to the
downturn in Southern California's real estate market.
In compliance with Statement of Financial Accounting Standards No. 121
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Disposed of (SFAS 121), the 1996 financial statements reported an expense for
the decline in fair value of unimproved land of $2,659,615. The 1997 financial
statements originally issued with the auditor's report dated January 28, 1998
reported $1,692,884 of income due to appreciation in fair value of land.
Pursuant to additional review by management and the predecessor accounting firm,
it was determined that SFAS 121 does not provide for recording appreciation in
fair value of a real estate asset. Therefore, the predecessor independent
accounting firm restated the 1997 financial statements on August 3, 1998 to
reverse the appreciation in fair value of land.
The Partnership's management believes that inflation has not had a material
effect on the Partnership's results of operations or financial condition.
Fiscal Quarters Ended March 31, 1999 and 1998
There were no revenues of the Partnership during the three-month period ended
March 31, 1999. Partnership revenues during the three-month period ended March
31, 1998 consisted of interest earned on funds held in reserve. No properties
were sold during the periods presented.
Investing activities for the three months ended March 31, 1999 and 1998 used
approximately $3,300 and $2,700 respectively, most of which was used to pay
development and carrying costs of the unimproved land held for investment.
The Partnership had one property at March 31, 1999 that is currently for sale.
Upon the sale, if any, of the property, the Partnership intends to distribute
the sales proceeds, less any reserves needed for winding up partnership
operations, to the partners.
Liquidity and Capital Resources
The Partnership has raised a total of $6,564,041, net of syndication costs, from
the sale of limited partnership units. During the period from inception through
December 31, 1988, the Partnership acquired a total of three properties for all
cash at a total expenditure of $6,159,225. The Partnership capitalized the
acquisition costs of the property and direct carrying costs, such as interest
and property taxes. The Partnership does not intend to acquire any additional
properties. The remaining one property was listed for sale in January 1999.
The Partnership's remaining parcel of land is located in San Bernardino County.
That region of Southern California experienced a significant economic recession
that has substantially eroded the value of real estate in that area. The region
is beginning to show some signs of recovery; however, the recovery has been very
slow.
In March, 1998, the general partners of the Partnership entered into an
agreement (the Financing Agreement) with PacWest Inland Empire, LLC (PacWest), a
Delaware limited Liability Company, whereby PacWest paid a total of $300,000 to
the general partners of the Partnership and ten other related partnerships (the
TMP Land Partnerships). PacWest agreed to pay up to an additional $300,000 for
any deficit capital accounts for these 11 partnerships in exchange for the
rights to distributions from the general partners; referred to as a
"distribution fee" as defined by the Financing Agreement.
In addition, PacWest agreed to loan and/or secure a loan for the TMP Land
Partnerships in the amount of $2,500,000. Loan proceeds will be allocated among
the 11 TMP Land Partnerships, based on partnership needs, from recommendations
made by PacWest, and under the approval and/or direction of the general
partners. A portion of these funds were loaned to the Partnership at 12% simple
interest over a 24-month period beginning April 1, 1998. The borrowings are
secured by the Partnership's properties, and the funds will be loaned, as
needed, in the opinion of the General Partners. These funds are not to exceed
50% of the 1997 appraised value of the properties, and will primarily be used to
pay for on-going property maintenance, reduction of existing debt, property
taxes in arrears, appropriate entitlement costs and Partnership operations.
PacWest, can, at their option, make additional advances with the agreement of
the general partners. However, the aggregate amount of cash loaned to the TMP
Land Partnerships is limited to a maximum of $2,500,000.
In April 1998, PacWest entered into a management, administrative and consulting
agreement (the Management Agreement) with the general partners of the
Partnership to provide the Partnership with overall management, administrative
and consulting services. PacWest currently contracts with third party service
providers to perform certain of the financial, accounting, and investor
relations services for the Partnership. PacWest is paid an annual fee of $3,972
for its administrative services.
Pursuant to the Financing Agreement, PacWest has acquired the general partners'
unsubordinated 1% interest in the Partnership and assumed responsibility for all
partnership administration while not replacing any of the general partners.
RISK FACTORS
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept four
digit entries to distinguish 21st century dates. As a result, computer systems
and/or software used by organizations may need to be upgraded to comply with the
"Y2K" requirements. There is significant uncertainty in the software and
information services industries concerning the potential effects associated with
such compliance. While the Partnership believes that its systems are compatible
with Y2K applications, there can be no assurance that all partnership systems
will function properly in all operating environments and on all platforms. The
failure to comply with Y2K requirements by systems not designed by the
Partnership may also have a material adverse effect on the Partnership's
business, financial condition and results of operations. The Partnership has
developed and implemented a plan to identify and address potential difficulties
associated with Y2K issues and does not expect to expend any significant funds
as a result of these issues.
The Partnership utilizes a number of computer software programs and operating
systems across its organization including applications used in financial
business systems and various administrative functions. The Partnership has
established an action plan for addressing Year 2000 issues. As a general matter,
the Partnership is vulnerable to failures by third parties to address their own
Year 2000 issues. The Partnership relies heavily upon third parties for
financial services. There can be no assurance that the Partnership's suppliers
and other third parties will adequately address their Year 2000 issues, and any
such issues could have a material adverse affect upon the Partnership's
financial condition and results of operation.
The Partnership has not spent a material amount of financial resources to
remediate Year 2000 problems and does not anticipate that it will spend a
material amount of financial resources to remediate Year 2000 problems in the
future. The costs of such remediation will be part of the Partnership's general
and administrative expenses.
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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.
Date: May 17, 1999
TMP INLAND EMPIRE II, LTD.
A California Limited Partnership
By: TMP Investments, Inc., a California Corporation as
Co-General Partner
By: \s\ William O. Passo
-------------------------------------
William O. Passo, President
By: \s\ Anthony W. Thompson
-------------------------------------
Anthony W. Thompson, Exec. Vice President
By: TMP Properties, A California General Partnership as
Co-General Partner
By: \s\ William O. Passo
-------------------------------------
William O. Passo, Partner
By: \s\ Anthony W. Thompson
-------------------------------------
Anthony W. Thompson, Partner
By: \s\ Scott E. McDaniel
-------------------------------------
Scott E. McDaniel Partner
By: JAFCO, Inc., A California Corporation
as Chief Accounting Officer
By: \s\ John A. Fonseca
-------------------------------------
John A. Fonseca, President
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