UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File #0-16783
Inland Mortgage Investors Fund, L.P.-II
(Exact name of registrant as specified in its charter)
Delaware #36-3495248
(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 MORTGAGE INVESTORS FUND, L.P.-II
(a limited partnership)
Balance Sheets
September 30, 1998 and December 31, 1997
(unaudited)
Assets
------
1998 1997
---- ----
Cash and cash equivalents (Note 1)................ $ 69,982 169,895
Accrued interest receivable....................... 34,201 35,419
Mortgage loans receivable (Note 3)................ 2,190,917 2,664,745
Miscellaneous receivable.......................... 96,065 -
------------ ------------
Total assets.................................. $ 2,391,165 2,870,059
============ ============
Liabilities and Partners' Capital
---------------------------------
Liabilities:
Accounts payable................................ $ 500 -
Due to affiliates (Note 2)...................... 5,068 1,544
Unearned income (Note 1)........................ 183 1,044
------------ ------------
Total liabilities............................. 5,751 2,588
------------ ------------
Partners' capital (Notes 1 and 2):
General Partner:
Capital contribution.......................... 500 500
Cumulative net income......................... 253,027 251,346
Supplemental Capital Contribution............. 102,528 77,871
Supplemental distributions to Limited Partners (102,528) (77,871)
Cumulative cash distributions................. (244,958) (244,958)
------------ ------------
8,569 6,888
Limited Partners: ------------ ------------
Units of $500. Authorized 40,000
Units, 18,776.32 outstanding (net of
offering costs of $1,072,632, of which
$89,040 was paid to Affiliates)............. 8,315,526 8,315,526
Cumulative net income......................... 5,765,689 5,599,307
Supplemental Capital Contributions from
General Partner............................. 102,528 77,871
Cumulative cash distributions................. (11,806,898) (11,132,121)
------------ ------------
2,376,845 2,860,583
------------ ------------
Total Partners' capital....................... 2,385,414 2,867,471
------------ ------------
Total liabilities and Partners' capital........... $ 2,391,165 2,870,059
============ ============
See accompanying notes to financial statements.
-2-
INLAND MORTGAGE INVESTORS FUND, L.P.-II
(a limited partnership)
Statements of Operations
For the three and nine months ended September 30, 1998 and 1997
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
Income: ---- ---- ---- ----
Interest and fees on mortgage
loans receivable (Note 3)...... $ 57,722 65,948 186,234 198,818
Interest on investments.......... 5,061 3,452 13,249 10,334
Other income..................... 1,152 3,836 15,002 12,102
---------- ---------- ---------- ----------
63,935 73,236 214,485 221,254
---------- ---------- ---------- ----------
Expenses:
Professional services to
Affiliates..................... 1,672 2,270 4,067 6,014
Professional services to
non-affiliates................. 500 1,100 21,730 22,848
General and administrative
expenses to Affiliates......... 5,738 7,560 15,196 26,610
General and administrative
expenses to non-affiliates..... 801 1,537 5,429 6,464
---------- ---------- ---------- ----------
8,711 12,467 46,422 61,936
---------- ---------- ---------- ----------
Net income..................... $ 55,224 60,769 168,063 159,318
========== ========== ========== ==========
Net income allocated to:
General Partner.................. 553 608 1,681 1,593
Limited Partners................. 54,671 60,161 166,382 157,725
---------- ---------- ---------- ----------
Net income..................... $ 55,224 60,769 168,063 159,318
========== ========== ========== ==========
Net income allocated to the one
General Partner Unit............. $ 553 608 1,681 1,593
========== ========== ========== ==========
Net income per Unit, basic and
diluted, allocated to Limited
Partners per Limited Partnership
Units of 18,776.32............... $ 2.91 3.24 8.86 8.40
========== ========== ========== ==========
See accompanying notes to financial statements.
-3-
INLAND MORTGAGE INVESTORS FUND, L.P.-II
(a limited partnership)
Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997
(unaudited)
1998 1997
---- ----
Cash flows from operating activities:
Net income...................................... $ 168,063 159,318
Adjustments to reconcile net income to net cash
provided by operating activities:
Changes in assets and liabilities:
Accrued interest receivable................. 1,218 2,687
Accounts payable............................ 500 -
Due to Affiliates........................... 3,524 6,899
Unearned income............................. (861) (860)
------------ ------------
Net cash provided by operating activities......... 172,444 168,044
------------ ------------
Cash flows from investing activities:
Miscellaneous receivables....................... (96,065) -
Principal payments collected.................... 473,828 55,900
------------ ------------
Net cash provided by investing activities......... 377,763 55,900
------------ ------------
Cash flows from financing activities:
Supplemental capital contribution............... 24,657 24,864
Distributions paid.............................. (674,777) (271,451)
------------ ------------
Net cash used in financing activities............. (650,120) (246,587)
------------ ------------
Net decrease in cash and cash equivalents......... (99,913) (22,643)
Cash and cash equivalents at beginning of period.. 169,895 177,482
------------ ------------
Cash and cash equivalents at end of period........ $ 69,982 154,839
============ ============
See accompanying notes to financial statements.
-4-
INLAND MORTGAGE INVESTORS FUND, L.P.-II
(a limited partnership)
Notes to Financial Statements
September 30, 1998
(unaudited)
Readers of this Quarterly Report should refer to the Partnership's audited
financial statements for the fiscal year ended December 31, 1997, which are
included in the Partnership's 1997 Annual Report, as certain footnote
disclosures which would substantially duplicate those contained in such audited
financial statements have been omitted from this Report.
(1) Organization and Basis of Accounting
Inland Mortgage Investors Fund, L.P.-II (the "Partnership"), was formed on
December 24, 1986 pursuant to the Delaware Revised Uniform Limited Partnership
Act to make or acquire loans collateralized by mortgages on improved, income
producing properties. On February 10, 1987, the Partnership commenced an
Offering of 40,000 Limited Partnership Units (the "Units") at $500 per Unit,
pursuant to a Registration Statement on Form S-11 under the Securities Act of
1933. The Offering terminated on August 10, 1988, with total sales of
18,776.32 Units, resulting in gross offering proceeds of $9,388,158, which does
not include the General Partner's contribution of $500. All of the holders of
these Units were admitted to the Partnership. Inland Real Estate Investment
Corporation is the General Partner.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Offering costs have been offset against the Limited Partners' capital accounts.
Loan assumption fees received are deferred as unearned income and amortized
over the remaining life of the related loan.
The Partnership considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
The Partnership sold participations in mortgage receivables which may yield the
Partnership a return which is greater than the return based on the stated
interest rate of the instrument. The differential between the stated rate and
the interest rate paid to the participant is recognized as income over the term
of the mortgage loan.
-5-
INLAND MORTGAGE INVESTORS FUND, L.P.-II
(a limited partnership)
Notes to Financial Statements
(continued)
September 30, 1998
(unaudited)
Interest income on mortgage loans receivable is accrued when earned. The
accrual of interest, on loans that are in default, is discontinued when, in the
opinion of the General Partner, the borrower has not complied with loan work-
out arrangements. Once a loan has been placed on a non-accrual status, all cash
received is applied against the outstanding loan balance until such time as the
borrower has demonstrated an ability to make payments under the terms of the
original or renegotiated loan agreement. The General Partner evaluates the
collectibility of the mortgage loans on a quarterly basis. This evaluation
includes determining the valuation of the underlying operating property subject
to the mortgage. Should a portion of the principal of the mortgage loan be
considered unrecoverable either through collection or foreclosure, a provision
would be made to reduce the carrying amount of the mortgage loans. The
Partnership intends to pursue collection of all amounts currently due from the
borrowers.
The Partnership believes that the interest rates associated with the mortgage
receivable approximate the market interest rates, and as such, the carrying
amount of the mortgages receivable approximate their fair value.
Statement of Financial Accounting Standards No. 128 "Earnings per Share" was
adopted by the Partnership for the year ended December 31, 1997 and has been
applied to all prior earnings periods presented in the financial statements.
The Partnership has no dilutive securities.
No provision for Federal income taxes has been made as the liability for such
taxes is that of the Partners rather than the Partnership.
In the opinion of management, the financial statements contain all the
adjustments necessary, which are of a normal recurring nature, to present
fairly the financial position and results of operations. Interim periods are
not necessarily indicative of results to be expected for the year.
(2) 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 to Affiliates and general and administrative expenses to
Affiliates, of which $5,068 and $1,544 remained unpaid at September 30, 1998
and December 31, 1997, respectively.
-6-
INLAND MORTGAGE INVESTORS FUND, L.P.-II
(a limited partnership)
Notes to Financial Statements
(continued)
September 30, 1998
(unaudited)
Inland Mortgage Servicing Corporation, a subsidiary of the General Partner,
services the Partnership's mortgage loans receivable. Its services include
processing mortgage collections and escrow deposits and maintaining related
records. For these services, the Partnership is obligated to pay fees at an
annual rate equal to 1/4 of 1% of the outstanding mortgage loans receivables
balance of the Partnership. Such fees of $4,774 and $5,041 for the nine months
ended September 30, 1998 and 1997, respectively, have been incurred and paid to
the subsidiary of the General Partner and are included in the Partnership's
general and administrative expenses to Affiliates.
The General Partner is required to make Supplemental Capital Contributions, if
necessary, from time to time in sufficient amounts to allow the Partnership to
make distributions to the Limited Partners amounting to at least 7% per annum
on their Invested Capital. The cumulative amount of such Supplemental Capital
Contributions at September 30, 1998 is $102,528, all of which has been received
from the General Partner.
(3) Mortgage Loans Receivable
Mortgage loans receivable are collateralized by first mortgages and wrap
mortgages on multi-family residential properties located in Chicago, Illinois
or its surrounding metropolitan area, except for the Evanston, Illinois loan
which is collateralized by a multi-use retail and office building and the
Richton Park, Illinois loan which is collateralized by a shopping mall. As
additional collateral, the Partnership holds assignments of rents and leases or
personal guarantees of the borrowers. Generally, the mortgage notes are
payable in equal monthly installments based on 20 or 30 year amortization
periods.
On May 12, 1998, the loan collateralized by the property located at 7409-13
Seeley, Chicago, Illinois was prepaid by the borrower. The total proceeds
received were $428,285, which represented the loan balance, accrued interest
and accrued late charges. The proceeds were distributed to the Limited
Partners in July 1998.
(4) Subsequent Events
On October 1, 1998, an Affiliate of the Partnership purchased the loan
collateralized by the property located at 7432 Washington for 100% of its
outstanding principal amount including accrued interest. The Partnership
received $50,300, its proportionate share of the payoff.
In October 1998, the Partnership paid a distribution of $124,338, all of which
was distributed to Limited Partners, including $66,217 of repayment proceeds
and $58,121 of operating cash flow contribution.
-7-
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 February 10, 1987, the Partnership commenced an Offering of 40,000 Limited
Partnership Units, pursuant to a Registration Statement on Form S-11 under the
Securities Act of 1933. The Offering terminated on August 10, 1988, with a
total of 18,776.32 Units being sold to the public at $500 per Unit resulting in
$9,388,158 gross offering proceeds, which were received by the Partnership,
which does not include the General Partner's $500 contribution. The
Partnership funded fifteen loans between December 1987 and June 1992 utilizing
$8,131,884 of capital proceeds collected, net of participations. As of
September 30, 1998, cumulative distributions to Limited Partners totaled
$11,806,898. A total of $6,913,464 of mortgage receivables has been repaid by
borrowers, of which $966,160 was reloaned, $5,940,967 was repayment proceeds
and principal amortization distributed to Limited Partners and $6,337 was added
to working capital reserve.
At September 30, 1998, the Partnership had cash and cash equivalents
aggregating $69,982, which will be utilized for future distributions to
partners and for working capital requirements. The source of future liquidity
and distributions is expected to be through cash generated by earnings from the
Partnership's mortgage investments and through the repayment of such
investments. To the extent that cash flow is insufficient to meet the minimum
7% annualized distribution to investors, as well as any other financial needs,
the Partnership may rely on Supplemental Capital Contributions from the General
Partner, advances from Affiliates of the General Partner or other short-term
financing.
At September 30, 1998, the Partnership had four mortgage loans receivable
totaling $2,190,917. The maturity dates range from October 1997 to July 2001.
In October 1997, the loan collateralized by the property located at 1549-1571
Sherman Avenue was extended on a month to month basis to allow the borrower
time to proceed with refinancing. In October 1997, Inland Real Estate
Investment Corporation, the General Partner, purchased the participating
interest in the loan from an unaffiliated third party and has accepted the
terms of the month to month extension. All other terms remain the same. As of
September 30, 1998, the principal balances of the loan and the participating
interest were $2,418,028 and $864,107, respectively.
-8-
On October 1, 1998, an Affiliate of the Partnership purchased the loan
collateralized by the property located at 7432 Washington for 100% of its
outstanding principal amount of $174,400, of which $49,829 is the Partnership's
proportionate share. When and as the Partnership receives Repayment Proceeds
as a result of the sale or repayment of a loan, the Repayment Proceeds which
are available for distribution will be distributed to the Limited Partners.
When the loans are repaid, cash flows from operating activities will decrease
as a result of the decrease in interest income earned by the Partnership.
Results of Operations
Interest and fee income on mortgage loans receivable decreased slightly for the
three and nine months ended September 30, 1998, as compared to the three and
nine months ended September 30, 1997. This is due primarily to the prepayment
of the mortgage loan receivable collateralized by the property located at 7409-
13 Seeley, Chicago, Illinois and the partial paydowns throughout 1997 and 1998
on the mortgage loan receivable collateralized by the property located at 7432
Washington, Forest Park, Illinois.
The increase in other income for the nine months ended September 30, 1998, as
compared to the nine months ended September 30, 1997, is due to an increase in
late charge income collected on mortgage loans receivable.
Professional services to Affiliates decreased for the three and nine months
ended September 30, 1998, as compared to the three and nine months ended
September 30, 1997, due to decreases in legal and accounting services required
by the Partnership.
General and administrative expenses to Affiliates decreased for the three and
nine months ended September 30, 1998, as compared to the three and nine months
ended September 30, 1997, due primarily to a decrease in data processing and
investor service expenses.
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.
-9-
STATE OF READINESS
The Partnership has identified the following two 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.
Borrowers and Suppliers: The Partnership is in the process of surveying
borrowers, suppliers and other parties with whom the Partnership does a
significant amount of business to identify the Partnership's potential exposure
in the event such parties are not year 2000 compliant in a timely manner. Since
this area involves some parties over which the Partnership has no control, such
as public utility companies, it is difficult, at best, to judge the status of
the outside companies' year 2000 compliance. The Partnership is working closely
with all suppliers of goods and services in an effort to minimize the impact of
the failure of any supplier to become year 2000 compliant by December 31, 1999.
The Partnership's investigations and assessments of possible year 2000 issues
are in a preliminary stage, and currently the Partnership is not aware of any
material impact on its business, operations or financial condition due to year
2000 non-compliance by any of the Partnership's borrowers or suppliers.
YEAR 2000 COSTS
The Partnership's General Partner and its Affiliates estimate that costs to
achieve year 2000 compliance will not exceed $50,000. However, only
approximately 1% of these costs will be directly allocated to and paid by the
Partnership. The balance of the year 2000 compliance costs, approximately 99%,
will be paid by the General Partner and its Affiliates. Total year 2000
compliance costs incurred through September 30, 1998 are estimated at
approximately $5,000.
YEAR 2000 RISKS
The most reasonable likely worst case scenario for the Partnership with respect
to the year 2000 non-compliance of its business computer systems would be the
inability to access information which could result in the failure to issue
financial reports. The most reasonable likely worst case scenario for the
Partnership with respect to the year 2000 non-compliance of its borrowers is
failure to receive mortgage payments which could result in the Partnership
being unable to meet cash requirements for monthly expenses.
-10-
CONTINGENCY PLAN
The Partnership is in the process of formulating a contingency plan which will
be developed by July of 1999.
PART II - Other Information
Items 1 through 6(b) are omitted because of the absence of conditions under
which they are required.
Item 7. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None
-11-
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 MORTGAGE INVESTORS FUND, L.P.-II
By: Inland Real Estate Investment Corporation
General Partner
/S/ ROBERT D. PARKS
By: Robert D. Parks
Chairman
Date: November 12, 1998
/S/ MARK ZALATORIS
By: Mark Zalatoris
Vice President
Date: November 12, 1998
/S/ KELLY TUCEK
By: Kelly Tucek
Principal Financial Officer and
Principal Accounting Officer
Date: November 12, 1998
-12-
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