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 June 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 number 0-19198 FIRST DEARBORN INCOME PROPERTIES L.P. II (Exact name of registrant as specified in its charter) Delaware 36-3591517 (State of organization) (IRS Employer Identification No.) 154 West Hubbard Street, Suite 250, Chicago, IL 60610 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (312) 464-0100 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 ____ Units outstanding as of June 30, 1998: 10,000 PART I - FINANCIAL INFORMATION Item 1. Financial Statements FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture Balance Sheets June 30, 1998 and December 31, 1997 (Unaudited) Assets June 30, December 31, 1998 1997 Current assets: Cash and cash equivalents (note 1) 1,052,765 1,659,443 Rents and other receivables 156,007 317,315 Due from affiliates 13,472 14,122 Prepaid expense 3,328 19,122 Total current assets 1,225,572 2,010,002 Investment property, at cost (note 1): Land 1,201,880 1,201,880 Building 8,372,099 8,372,099 9,573,979 9,573,979 Less accumulated depreciation (2,175,177) (2,032,976) 7,398,802 7,541,003 Investment in unconsolidated venture (note 2) (71,332) (58,669) Deferred leasing and loan costs 45,004 49,488 Total assets 8,598,046 9,541,824 <FN> See accompanying notes to the financial statements. FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture Balance Sheets June 30, 1998 and December 31, 1997 (Unaudited) Liabilities and Partners' Capital Accounts June 30, December 31, 1998 1997 Current liabilities: Accounts payable and accrued expenses 412,361 328,632 Accrued interest 30,423 30,976 Current portion of long-term debt 170,500 166,915 Total current liabilities 613,284 526,523 Long-term debt 4,322,668 4,408,018 Venture partners' equity in consolidated venture (note 2) 1,366,618 1,508,231 Tenant security deposits 5,433 5,433 Total long-term liabilities 5,694,719 5,921,682 Total liabilities 6,308,003 6,448,205 Partners' capital accounts (deficits) (note 1): General partners: Capital contributions 1,000 1,000 Cumulative net income 3,856 4,280 4,856 5,280 Limited partners: Capital contributions 4,058,963 4,058,963 Cumulative net income 381,722 423,674 Cumulative cash distributions (2,155,498) (1,394,298) 2,285,187 3,088,339 Total partners' capital accounts 2,290,043 3,093,619 Commitments and contingencies (note 2) Total Liabilities and Partners' Capital 8,598,046 9,541,824 <FN> See accompanying notes to the financial statements. FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture Consolidated Statement of Operations Three months ended June 30, 1998 and 1997 (Unaudited) 1998 1997 Revenues: Rental income 286,969 323,104 Tenant charges 109,625 129,935 Interest income 9,915 5,406 Total revenues 406,509 458,445 Expenses: Property operating expenses 219,694 254,354 Interest 91,548 94,782 Depreciation 71,100 72,880 Amortization 2,394 2,395 General and administrative expenses 26,962 20,640 Total expenses 411,698 445,051 Operating income (loss) (5,189) 13,394 Partnership's share of operations of unconsolidated ventures (3,141) (396) Venture partner's share of consolidated venture's operations (note 1) (7,421) (12,779) Net income (loss) (15,751) 220 Net income (loss) per limited partnership unit (1.56) 0.02 Cash distribution per limited partnership unit 2.06 2.06 <FN> See accompanying notes to the financial statements. FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture Consolidated Statement of Operations Six months ended June 30, 1998 and 1997 (Unaudited) 1998 1997 Revenues: Rental income 580,055 635,007 Tenant charges 246,111 285,445 Interest income 25,052 9,693 Total revenues 851,218 930,145 Expenses: Property operating expenses 457,152 481,021 Interest 183,930 190,332 Depreciation 142,201 145,759 Amortization 4,789 4,996 General and administrative expenses 72,970 62,621 Total expenses 861,042 884,729 Operating income (loss) (9,824) 45,416 Partnership's share of operations of unconsolidated ventures (12,663) (32,614) Venture partner's share of consolidated venture's operations (note 1) (19,889) (45,650) Net income (loss) (42,376) (32,848) Net income (loss) per limited partnership unit (4.20) (3.25) Cash distribution per limited partnership unit 76.12 4.13 <FN> See accompanying notes to the financial statements. FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture Consolidated Statements of Cash Flows Six months ended June 30, 1998 and 1997 (Unaudited) 1998 1997 Cash flows from operating activities: Net income (loss) (42,376) (32,848) Items not requiring (providing) cash or cash equivalents: Depreciation 142,201 145,759 Amortization 4,789 4,996 Partnership's share of operations of unconsolidated ventures 12,663 100,558 Venture partners' share of consolidated venture's operations (141,613) (68,508) Changes in: Rents and other receivables 161,958 88,411 Prepaid expenses 15,794 27,002 Accounts payable and accrued expenses 83,176 5,436 Tenant deposits - (6) Net cash provided by operating activities 236,592 263,640 Cash flow from investment activities: Additions to building and deferred costs (305) - Net cash (used in) investment activities (305) - Cash flows from financing activities: Distributions to limited partners (761,200) (41,303) Principal payments on long-term debt (81,765) (75,406) Net cash used in financing activities (842,965) (116,709) Net increase (decrease) in cash and cash equivalents (606,678) 146,931 <FN> See accompanying notes to the financial statements. FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture Notes to Consolidated Financial Statements June 30, 1998 and 1997 (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) Basis of Accounting For the three and six month periods ended June 30, 1998 and June 30, 1997 the accompanying consolidated financial statements include the accounts of the Partnership and its consolidated venture - Sycamore Mall Associates (the "Venture"). The effect of all transactions between the Partnership and the Venture has been eliminated. The equity method of accounting has been applied in the accompanying consolidated financial statements with respect to the Partnership's interest in Evanston Galleria Limited for the three and six months ended June 30, 1998 and June 30, 1997 and Country Isle Associates for the three and six months ended June 30, 1997. The Partnership records are maintained on the accrual basis of accounting as adjusted for Federal income tax reporting purposes. The accompanying consolidated financial statements have been prepared from such records after making appropriate adjustments, where applicable, to present the Partnership's accounts in accordance with generally accepted accounting principles (GAAP). Such adjustments are not recorded on the records of the Partnership. The net effect of these adjustments for the six months ended June 30, 1998 and 1997 is summarized as follows: 1998 1997 GAAP Tax GAAP Tax Basis Basis Basis Basis Net income (loss) (42,376) (39,300) (32,848) (49,301) Net income (loss) per limited partnership unit (4.20) (3.90) (3.25) (4.90) The net loss per limited partnership unit presented is based on the weighted limited partnership units outstanding at the end of each period (10,000). FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture Notes to Consolidated Financial Statements - Continued Partnership distributions from unconsolidated ventures are considered cash flow from operating activities to the extent of the Partnership's cumulative share of net operating earnings before depreciation and non-cash items. In addition, the Partnership records amounts held in U.S. Government obligations, commercial paper and certificates of deposit at cost which approximates market. For the purposes of these statements, the Partnership's policy is to consider all such investments with an original maturity of three months or less ($720,414 and $1,400,707 at June 30, 1998 and December 31, 1997, respectively) as cash equivalents. Deferred offering costs were charged to the partners' capital accounts upon consummation of the offering. Deferred loan costs are amortized over the terms of the related agreements using the straight- line method. Depreciation on the investment properties acquired has been provided over the estimated useful lives of 5 to 30 years using the straight-line method. No provision for Federal income taxes has been made as any liability for such taxes would be that of the partners rather than the Partnership. The Partnership adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long- Lived Assets and for Long Lived Assets to be Disposed Of", on January 1, 1996. SFAS 121 requires that the Partnership record an impairment loss on its property held for investment whenever the property's carrying value cannot be fully recovered through estimated undiscounted cash flows from its 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. In addition, SFAS 121 provides that a property may not be depreciated while being held for sale. As of October 1, 1997, the Evanston Galleria property was considered to be held for sale. In accordance with SFAS 121, no depreciation expense relative to the property was recorded from October 1, 1997 through June 30, 1998. (2) Venture Agreements The Partnership has entered into three joint venture agreements with partnerships sponsored by affiliates of the General Partners. Pursuant to such agreements, the Partnership has made capital contributions aggregating $3,652,066 through June 30, 1998. The Partnership has acquired, through these ventures, interests in a mixed use retail/residential property and two shopping centers. FIRST DEARBORN INCOME PROPERTIES L.P. II (a limited partnership) and Consolidated Venture Notes to Consolidated Financial Statements - Continued (3) Transactions with Affiliates Fees, commissions and other expenses required to be paid by the Partnership to affiliates of the General Partners for the six months ended June 30, 1998 and 1997 are as follows: Unpaid at June 30, 1998 1997 1998 Reimbursement for administrative services 10,000 10,000 - 10,000 10,000 - (4) Unconsolidated Venture - Summary Information Summary income statement information for Evanston Galleria Limited Partnership for the six months ended June 30, 1998 and Evanston Galleria Limited Partnership and Country Isle Plaza for the six months ended June 30, 1997, is as follows: 1998 1997 Total revenue 672,404 1,565,761 Operating income (loss) (46,635) (118,320) Partnership's share of income (loss) (12,663) (32,614) (5) Adjustments In the opinion of the Managing General Partner, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation have been made to the accompanying consolidated financial statements as of June 30, 1998 and 1997. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources At June 30, 1998, the Partnership had cash and cash equivalents of $1,052,765 which will be utilized for working capital requirements and for future distributions to Partners. This is $653,941 less than the $1,659,443 balance at December 31, 1997. The Partnership made a distribution in the amount of $740,600 to Limited Partners during the first quarter of 1998. The Partnership received a special distribution in the amount of $991,000 from the December 1997 sale of Country Isles Associates, which it then distributed to the Limited Partners. During the three and six month periods ended June 30, 1998, the Partnership distributed $20,600 ($2.06 per unit) and $761,200 ($76.12 per unit), respectively, to Limited Partners. This compares to $20,600 ( $2.06 per unit) and $41,303 ( $4.13 per unit) during the three and six month periods ended June 30, 1997. The Partnership has continued to build additional cash reserves for Sycamore Mall's anticipated releasing program. Net cash provided by operating activities during the six months ended June 30, 1998 was $236,592, a decrease of $27,048 from the $263,640 of cash provided by operating activities during the six months ended June 30, 1997. On December 17, 1997, Country Isles Associates, sold the Country Isles Shopping Center in Fort Lauderdale, Florida, to Principal Mutual Life Insurance Company ("Buyer"). The total purchase price received by Country Isles was $13.2 million, which price was determined through arm's length negotiations with Buyer. Of this total purchase price, approximately $7.9 million was used to repay amounts owed to the lender holding the mortgage on the shopping center and approximately $595,000 was used for customary additional selling expenses and prorations. The net proceeds to Country Isles after these deductions were approximately $4.7 million. Of these proceeds, the Partnership received approximately $991,000 for its 21% interest. During 1997, the Evanston Galleria experienced occupancy rates which ranged from 77% to 86%. As of December 31, 1997 occupancy was 83%. However, a lease had been entered into to lease the lower level space of 11,300 square feet. This tenant has taken occupancy along with one additional retail tenant. This has increased occupancy to 95%, as of March 31, 1998. The first mortgage on the property matured on May 1, 1998, however an amendment has been entered into which extends the maturity of the loan to August 31, 1998. Negotiations are currently underway for an additional extension of the mortgage loan. There can be no assurance that such an extension will be granted. The Evanston Galleria property is currently being marketed for sale. As the Partnership intends to distribute all "net cash receipts" and "sales proceeds" in accordance with the terms of the Partnership Agreement, and does not intend to reinvest any such proceeds, the Partnership is intended to be self-liquidating in nature. The Partnership's future source of liquidity and distributions is expected to be through cash generated by the Partnership's investment properties and from the sale and refinancing of such properties. To the extent that additional payments are required under a purchase agreement or a property does not generate an adequate cash flow to meet its requirements, the Partnership may withdraw funds from the working capital reserve which it maintains. Results of Operations - 1998 compared to 1997 For the three and six month periods ended June 30, 1998 and June 30, 1997, the accompanying consolidated financial statements include the accounts of the Partnership and its consolidated venture - Sycamore Mall Associates. The effect of all transactions between the Partnership and the Venture has been eliminated. The equity method of accounting has been applied in the accompanying consolidated financial statements with respect to the Partnership's interest in Evanston Galleria Limited for the three and six months ended June 30, 1998 and June 30, 1997 and Country Isle Associates for the three and six months ended June 30, 1997. Net loss for the six months ended June 30, 1998 was $42,376 as compared to $32,848 during the six months ended June 30, 1997. The decrease in operating results is a result of decreased profitability at Sycamore Mall which was partially offset by improvement at the Evanston Galleria. The decreased profitability at Sycamore Mall is a result of increased vacancy, averaging 82% in 1998 as compared to 87.5% in 1997. Management is currently negotiating with new tenants for Sycamore Mall, but no new leases have been signed.. The $54,952 (9%) decrease in rental income and the $39,334 (14%) decrease in tenant charges, for the six month period ended June 30, 1998 as compared to the six month period ended June 30, 1997 is attributed to an increase in vacancy at Sycamore Mall. The opening of a new regional mall in the area of the Sycamore Mall has resulted in the loss of several tenants. Management is currently negotiating with prospective tenants which would significantly increase occupancy. The $15,359 (158%) increase in interest income for the six month period ended June 30, 1998 as compared to the six month period ended June 30, 1997 is attributed to the increase in cash reserves which are being maintained since the sale of the Country Isles property in December 1997. The Partnership is maintaining these additional reserves in anticipation of needed equity for the Sycamore Mall releasing efforts.. The $23,869 (5%) decrease in property operating expenses for the six month period ended June 30, 1998 as compared to the six month period ended June 30, 1997 is attributed to a decrease in property maintenance expenses at Sycamore Mall. The $6,402 (3%) decrease in interest expenses for the six month period ended June 30, 1998 as compared to the six month period ended June 30, 1997 is attributable a reduction in the outstanding indebtedness at Sycamore Mall. The $10,349 (17%) increase in general and administrative expenses for the six month period ended June 30, 1998 as compared to the six month period ended June 30, 1997 is attributable to an increase in professional fees related to the annual audit and tax return preparation. The Partnership's share of operations of unconsolidated subsidiaries resulted in a loss allocation of $12,663 during the six months ended June 30, 1998, as compared to a loss allocation of $32,614 during the six month period ended June 30, 1997. Evanston Galleria has released most of its retail space. Occupancy is running at 95 % as compared to 86 % in the prior year. The Partnership's allocation of consolidated venture's operations to the venture partners was an allocation of $19,889 during the six months ended June 30, 1998 as compared to an allocation of $45,650 during the six months ended June 30, 1997. As a result of a decrease in operating income at Sycamore Mall, the Partnership has decreased the amount of the income which is then allocated to the venture's partners. OCCUPANCY The following is a list of approximate occupancy levels by quarter for the Partnership's investment properties: at at at at at at 03/31/97 06/30/97 09/30/97 12/31/97 03/31/98 06/30/98 Evanston Galleria Evanston, IL 86% 86% 77% 83% 95% 94% Country Isles Ft. Lauderdale, FL 100% 99% 100% n/a n/a n/a Sycamore Mall Iowa City, Iowa 88% 89% 89% 90% 85% 79% Part II - OTHER INFORMATION Items 1, 2, 3, 4, and 5 of Part II are omitted because of the absence of conditions under which they are required. Item 6. Exhibits and Reports on Form 8-K a) Exhibits None b) Reports on Form 8-K No reports on Form 8-K were filed for the period covered by this report. 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. FIRST DEARBORN INCOME PROPERTIES L.P. II (Registrant) By: FDIP, Inc. (Managing General Partner) August 14, 1998 By: Robert S. Ross President (Principal Executive Officer) August 14, 1998 By: Bruce H. Block Vice President (Principal Financial Officer)