10-Q 1 d89564e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2001 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-Q ------------ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) ------- OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001............... 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 NO. 0-17183 ------------ MURRAY INCOME PROPERTIES II, LTD. (Exact Name of Registrant as Specified in its Charter) TEXAS 75-2085586 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 13615 NEUTRON ROAD, DALLAS, TEXAS 75244-4411 (Address of principal executive offices) (Zip Code) (972) 991-9090 Registrant's Telephone Number, including Area Code 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 ------- ------- 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MURRAY INCOME PROPERTIES II, LTD. (A LIMITED PARTNERSHIP) BALANCE SHEETS

See accompanying notes to financial statements. 2 3 MURRAY INCOME PROPERTIES II, LTD. (A LIMITED PARTNERSHIP) STATEMENTS OF EARNINGS (UNAUDITED)

See accompanying notes to financial statements. 3 4 MURRAY INCOME PROPERTIES II, LTD. (A LIMITED PARTNERSHIP) STATEMENTS OF CHANGES IN PARTNERS' EQUITY (UNAUDITED)

See accompanying notes to financial statements. 4 5 MURRAY INCOME PROPERTIES II, LTD. (A LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying notes to financial statements. 5 6 MURRAY INCOME PROPERTIES II, LTD. (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 1. BASIS OF ACCOUNTING The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 income and expenses during the reporting period. Actual results could differ from those estimates. On March 10, 2000, in a special meeting of the Limited Partners, the Limited Partners approved the proposed sale of the Partnership's properties, in one or a series of sale transactions, the subsequent dissolution and liquidation of the Partnership upon the sale of the Partnership's last property, and an amendment to the Partnership Agreement to permit the proposed asset sale, dissolution and liquidation on the terms set forth in a proxy statement mailed to the Limited Partners on or about January 14, 2000. As a result, the Partnership began marketing the properties for sale, and after the sale of the last property and the winding up of all other business affairs, the Partnership will be liquidated and dissolved. Each of the Partnership's directly owned properties were sold during the fourth quarter of 2000. The only remaining property is the Partnership's 15% interest in Tower Place Joint Venture, that owns the Tower Place Festival Shopping Center. No provision for federal income taxes has been made as the liabilities for such taxes are those of the individual Partners rather than the Partnership. The Partnership files its tax return on the accrual basis used for Federal income tax purposes. During 2000, the Partnership owned and operated two shopping centers (Germantown Collection and Paddock Place) located in the state of Tennessee. In 1999, Tennessee passed the "Tax Revision and Reform Act of 1999" that imposes state taxes on limited partnerships doing business within the state. This law was applicable to the Partnership effective January 1, 2000. For the six months ended June 30, 2000, the Partnership accrued state excise tax expense to the state of Tennessee in the amount of $32,900. In the accompanying balance sheet at December 31, 2000, state excise tax payable and other liabilities included $256,682 in state excise/franchise tax payable. Because both Tennessee shopping centers were sold during the year ended December 31, 2000, the Partnership no longer has operations or assets in that state as of the end of 2000. Therefore, no future state excise/franchise taxes will be due or payable to the state of Tennessee. The outstanding amount of state excise/franchise taxes at December 31, 2000 was paid during the quarter ended March 31, 2001. Basic earnings per limited partnership interest are based upon the Limited Partnership Interests outstanding at period-end and the net earnings and cash distributions are allocated to the Limited Partners in accordance with the terms of the Partnership Agreement, as amended. The following information relates to estimated fair values of the Partnership's financial instruments as of June 30, 2001 and December 31, 2000. For cash and cash equivalents, accounts receivable and accounts payable, the carrying amounts approximate fair market value because of the short maturity of these instruments. 6 7 2. PARTNERSHIP AGREEMENT Pursuant to the terms of the Partnership Agreement, Cash Distributions from Operations ("Operating Distributions") are allocated and paid 7% to the Non-corporate General Partner, 3% to the Corporate General Partner and 90% to the Limited Partners. An amount equal to 5% of Operating Distributions out of the 7% allocated to the Non-corporate General Partner and the entire amount of Operating Distributions allocated to the Corporate General Partner is subordinated to the prior receipt by the Limited Partners of a non-cumulative 7% annual return from either Operating Distributions or Cash Distributions from Sales or Refinancings. Net profits or losses, excluding depreciation and gain or loss from sales or refinancing, are allocated to the General Partners and Limited Partners in the same proportions as the Operating Distributions for the year. All depreciation is allocated to those Limited Partners subject to Federal income taxes. Cash Distributions from the sale or refinancing of a property are allocated as follows: (a) First, all Cash Distributions from Sales or Refinancings shall be allocated 99% to the Limited Partners and 1% to the Non-corporate General Partner until the Limited Partners have been returned their Original Invested Capital from Cash Distributions from Sales or Refinancings, plus their Preferred Return from either Cash Distributions from Operations or Cash Distributions from Sales or Refinancings. (b) Next, all Cash Distributions from Sales or Refinancings shall be allocated 99% to the General Partners and 1% to the Non-corporate General Partner in an amount equal to any unpaid Cash Distributions from Operations subordinated to the Limited Partners' 7% non-cumulative annual return. Such 99% shall be allocated 62 1/2% to the Non-corporate General Partner and 37 1/2% to the Corporate General Partner. (c) Next, all Cash Distributions from Sales or Refinancings shall be allocated 1% to the Non-corporate General Partner and 99% to the Limited Partners and the General Partners. Such 99% will be allocated 85% to the Limited Partners and 15% to the General Partners. Such 15% shall be allocated 62 1/2% to the Non-corporate General Partner and 37 1/2% to the Corporate General Partner. (d) Upon the sale of the last property owned by the Partnership, Cash Distributions from Sales or Refinancings shall be allocated and paid to the Partners in an amount equal to, and in proportion with, their existing capital account balances. Such distributions shall be made only after distribution of all Cash Distributions from Operations and only after all allocations of Partnership income, gain, loss, deduction and credit (including net gain from the sale or other disposition of the properties) have been closed to the Partners' respective capital accounts. 3. INVESTMENT IN JOINT VENTURE The Partnership owns a 15% interest in Tower Place Joint Venture, a joint venture that owns and operates Tower Place Festival Shopping Center located in Pineville (Charlotte), North Carolina. The Partnership accounts for the joint venture using the equity method. The remaining 85% interest in the joint venture is owned by Murray Income Properties I, Ltd. The Tower Place Joint Venture Agreement provides that the Partnership will share profits, losses and cash distributions according to the Partnership's 15% ownership interest in the joint venture. The Joint Venture discontinued depreciation on the shopping center on March 10, 2000, the date on which the Joint Venture changed the classification of the shopping center to property held for sale. 7 8 4. TRANSACTIONS WITH AFFILIATES Murray Realty Investors IX, Inc. ("MRI IX"), the Corporate General Partner, entered into a property management agreement with the Partnership for the management of 1202 Industrial Place, effective January 1, 1996. Pursuant to this agreement, MRI IX earned property management fees in the amount of $9,196 during the six months ended June 30, 2000. This property was sold on December 1, 2000, and the Corporate General Partner no longer earns any fees under this agreement. 5. OTHER Information furnished in this interim report reflects all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary to reflect a fair presentation of the results for the periods presented. The financial information included in this interim report as of June 30, 2001 and for the three and six months ended June 30, 2001 and 2000 has been prepared by management without audit by independent public accountants. The Partnership's 2000 annual report contains audited financial statements including the notes to the financial statements and should be read in conjunction with the financial information contained in this interim report. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources On March 10, 2000, in a special meeting of the Limited Partners, the Limited Partners approved the proposed sale of the Partnership's properties, in one or a series of sale transactions, the subsequent dissolution and liquidation of the Partnership upon the sale of the Partnership's last property, and an amendment to the Partnership Agreement to permit the proposed asset sale, dissolution and liquidation on the terms set forth in a proxy statement mailed to the Limited Partners on or about January 14, 2000. In April 2000, the Partnership's properties were put on the market and the General Partners began actively soliciting offers. On April 6, 2001, Tower Place Joint Venture entered into a non-binding letter of intent to sell Tower Place. However, the General Partners and the prospective purchaser were unable to come to terms on a definitive purchase agreement and the sale was not completed. Since then, management has implemented a new marketing plan in order to generate offers for the property. This includes updating the sales package to reflect new leases which have increased the percentage of space leased to 97%. The marketing materials now include pictures of the recently completed Bally Total Fitness building. Management is also aggressively targeting new prospective buyers. The General Partners believe that these measures, along with the opening of Bally Total Fitness and signing of other new tenants, will enhance the marketability of Tower Place. If the Partnership is successful in selling its interest in Tower Place Joint Venture, the Partnership will be liquidated and dissolved. Effective March 10, 2000, the Partnership's properties were reported as properties held for sale at the lower of carrying value or fair value less estimated cost to sell. Management of the Partnership expects no loss to result from the sale of its interest in Tower Place Joint Venture. As of June 30, 2001, the Partnership had cash and cash equivalents of $8,095,763, which included $8,070,021 invested in money market instruments. Such amounts represent cash generated from operations, sales of properties held for sale and working capital reserves. 8 9 As of June 30, 2001, the Partnership's only significant asset, other than cash, is its 15% interest in Tower Place Joint Venture, accounted for on the equity method. The decrease in state excise tax payable and other liabilities of $291,340 from December 31, 2000 to June 30, 2001 is primarily due to the payment of the 2000 state of Tennessee excise/franchise taxes and severance benefits paid to one Partnership employee whose employment was terminated on February 28, 2001. The remaining $231,006 at June 30, 2001 in state excise tax payable and other liabilities represents severance benefits accrued but not yet paid. During the three months ended June 30, 2001, the Partnership made Cash Distributions from Operations of $141,609 (which was reduced by $10,695 related to 2000 North Carolina state income taxes paid on behalf of the partners in connection with the operation of Tower Place Joint Venture) relating to the three-month period ended March 31, 2001. Subsequent to June 30, 2001, the Partnership made Cash Distributions from Operations of $55,944 relating to the three months ended June 30, 2001. The funds distributed were derived from the net cash flow generated from operations of the Partnership's interest in Tower Place Joint Venture and from interest earned, net of administrative expenses, on funds invested in short-term money market instruments. Future liquidity is currently expected to result from cash generated from the Partnership's investment in joint venture (which could be affected negatively in the event of weakened occupancies and/or rental rates), interest earned on funds invested in short-term money market instruments, and ultimately through the sale of the Partnership's final interest in Tower Place Joint Venture. Results of Operations Rental income decreased $1,556,938 for the six months ended June 30, 2001 as compared to the same period in 2000 because the Partnership sold its three properties during the year ended December 31, 2000. The small amount of rental income collected during the six months ended June 30, 2001 related to percentage rent received from two tenants attributable to the period during 2000 prior to the property sales. "Equity in earnings of joint venture" represents the Partnership's 15% interest in the earnings of Tower Place Joint Venture. Rental income at Tower Place in Pineville (Charlotte), North Carolina increased $119,099 for the six months ended June 30, 2001 as compared to the same period in 2000 primarily due to higher occupancy. On February 14, 2000, the joint venture executed a lease termination agreement with General Cinema. Pursuant to the agreement, General Cinema paid Tower Place Joint Venture a termination fee as consideration for the Joint Venture releasing the tenant from its future lease obligations. The termination fee of $898,562, net of the book value of the theater which was demolished to allow for construction of the Bally Total Fitness facility, was recognized as income during the quarter ended March 31, 2000. Tower Place's total operating expenses increased primarily because of higher repair and maintenance costs and amortization of deferred leasing costs. The following information details rental income generated, bad debt expense incurred and average occupancy for the periods shown for Tower Place.

9 10 The Partnership's share of income from the joint venture decreased $111,624 for the six months ended June 30, 2001 as compared to the same period in 2000 for the reasons stated above. The Partnership's share of income excluding the gain on termination of lease increased $23,160 for the six months ended June 30, 2001, as compared to the same period in 2000. Tower Place averaged 91% occupancy during the second quarter of 2001, a 3% decrease from the previous quarter. In May 2001, a tenant who occupied 2,100 square feet vacated its space upon expiration of its lease. Also accounting for the decrease in occupancy is that, in conjunction with the construction of the space for Bally Total Fitness, an additional 6,470 square feet was built and became available for occupancy in May. In July 2001, 2,974 square feet of this new space was combined with 2,660 square feet of existing vacant space and leased to a new tenant who will take occupancy around October 1 of this year. A new tenant who signed a lease for 1,512 square feet took occupancy in June. Another new lease for 2,100 square feet was signed and the tenant will take occupancy in the third quarter of 2001. A restaurant which occupied 2,310 square feet vacated its space during this second quarter, but the space was leased to a new operator who re-opened in July. Two tenants totaling 5,361 square feet renewed their leases for three years. Tower Place is currently 97% leased. Depreciation, prior to March 10, 2000, was provided over the estimated useful lives of the respective assets using the straight line method. The estimated useful lives of the buildings and improvements ranged from three to twenty-five years. No depreciation was provided on properties held for sale after March 10, 2000, the date on which the Partnership's Partners changed the classification of its properties to Properties held for sale. Total property operating expenses decreased substantially for the six months ended June 30, 2001 as compared to the same period in 2000 because the Partnership's directly owned properties were sold during calendar year 2000. The small amount of expenses reported during the six months ended June 30, 2001 related to utility charges and service contract costs received after the close of the prior year end. General and administrative expenses incurred are related to legal and accounting costs, rent, investor services costs, salaries and benefits and various other costs required for the administration of the Partnership. General and administrative expenses decreased $1,136 for the six months ended June 30, 2001 as compared to the same period in 2000, with decreases in appraisal costs, salaries and benefits, and travel expenses partially offset by increases in accounting and legal costs and investor services costs. Words or phrases when used in the Form 10-Q or other filings with the Securities and Exchange Commission, such as "does not believe" and "believes" or similar expressions, are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Partnership's financial instruments consist of cash and cash equivalents and accounts payable. The carrying amount of these instruments approximate fair value due to the short-term nature of these instruments. Therefore, the Partnership believes it is relatively unaffected by interest rate changes or other market risks except for the potential increase or decrease in interest income from its funds invested in short-term money market funds. 10 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the second quarter of the year covered by this report through the solicitation of proxies or otherwise. 11 12 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 2a Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934. Reference is made to the Partnership's Schedule 14A, filed with the Securities and Exchange Commission on January 13, 2000. (File No. 0-17183) 2b Definitive Soliciting Additional Materials to Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934. Reference is made to the Partnership's Schedule 14A, filed with the Securities and Exchange Commission on February 9, 2000. (File No. 0-17183) 2c Definitive Soliciting Additional Materials to Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934. Reference is made to the Partnership's Schedule 14A, filed with the Securities and Exchange Commission on February 23, 2000. (File No. 0-17183) 3a Agreement of Limited Partnership of Murray Income Properties II, Ltd. Reference is made to Exhibit A of the Prospectus dated February 20, 1986 contained in Amendment No. 1 to Partnership's Form S-11 Registration Statements filed with the Securities and Exchange Commission on February 13, 1986. (File No. 33-2294) 3b Amended and Restated Certificate and Agreement of Limited Partnership dated as of November 15, 1989. Reference is made to Exhibit 3b to the 1989 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 1990. (File No. 0-17183) 3c Amended and Restated Certificate and Agreement of Limited Partnership dated as of January 10, 1990. Reference is made to Exhibit 3c to the 1989 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 1990. (File No. 0-17183) 3d Amendment to Amended and Restated Certificate and Agreement of Limited Partnership, dated March 22, 2000. Reference is made to Exhibit 3d to the 1999 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2000. (File No. 0-17183) 10a Management Agreement with Murray Realty Investors IX, Inc. for management and operation services described in the Management Agreement dated January 1, 1996 at 1202 Industrial Place. Reference is made to Exhibit 10a to the 1996 Form 10-Q filed with the Securities and Exchange Commission on May 13, 1996. (File No. 0-17183) 99a Glossary as contained in the Prospectus dated February 20, 1986 filed as part of Amendment No. 2 to Registrant's Form S-11 Registration Statement (File No. 33-2394). Filed herewith. 99b Article XIII of the Agreement of Limited Partnership as contained in the Prospectus dated February 20, 1986 filed as part of Amendment No. 2 to Registrant's Form S-11 Registration Statement (File No. 33-2394). Filed herewith. 99c Amendment number nine to the Agreement of Limited Partnership contained in the Proxy Statement dated October 11, 1989. Filed herewith. 99d Management Compensation as contained in the Prospectus dated February 20, 1986 filed as part of Amendment No. 2 to Registrant's Form S-11 Registration Statement (File No. 33-2394). Filed herewith. (b) Reports on Form 8-K filed during the quarter ended June 30, 2001: None 12 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. MURRAY INCOME PROPERTIES II, LTD. By: Murray Realty Investors IX, Inc. A General Partner Dated: August 7, 2001 By: /s/ Mitchell Armstrong ---------------------------------- Mitchell Armstrong President Chief Financial Officer 13 14 INDEX TO EXHIBITS

MURRAY INCOME PROPERTIES II LTD 10-Q