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 #0-18456
Inland Mortgage Investors Fund III, L.P.
(Exact name of registrant as specified in its charter)
Delaware #36-3604866
(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 III, L.P.
(a limited partnership)
Balance Sheets
September 30, 1998 and December 31, 1997
(unaudited)
Assets
------
1998 1997
---- ----
Cash and cash equivalents (Note 1)................ $ 496,698 93,296
Accrued interest receivable....................... 1,966 8,383
Mortgage loans receivable (Note 3)................ 124,571 958,356
------------ ------------
Total assets...................................... $ 623,235 1,060,035
============ ============
Liabilities and Partners' Capital
---------------------------------
Liabilities:
Accounts payable................................ $ 500 -
Distributions payable........................... 600,000 44,236
Due to Affiliates (Note 2)...................... 2,465 837
------------ ------------
Total liabilities............................. 602,965 45,073
------------ ------------
Partners' capital (Notes 1 and 2):
General Partner:
Capital contribution.......................... 500 500
Supplemental Capital Contributions............ 306,874 306,874
Supplemental distributions to Limited Partners (306,874) (306,874)
Cumulative net income......................... 24,497 23,202
Cumulative distributions...................... (19,432) (18,137)
------------ ------------
5,565 5,565
Limited Partners: ------------ ------------
Units of $500. Authorized 40,000 Units,
5,674.50 Units outstanding at September 30,
1998 and December 31, 1997 (net of offering
costs of $422,642, of which $115,754 was
paid to Affiliates)......................... 2,414,607 2,414,607
Supplemental Capital Contributions from
General Partner............................. 306,874 306,874
Cumulative net income......................... 895,140 849,216
Cumulative distributions...................... (3,601,916) (2,561,300)
------------ ------------
14,705 1,009,397
------------ ------------
Total Partners' capital....................... 20,270 1,014,962
------------ ------------
Total liabilities and Partners' capital........... $ 623,235 1,060,035
============ ============
See accompanying notes to financial statements.
-2-
INLAND MORTGAGE INVESTORS FUND III, L.P.
(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 on mortgage loans
receivable (Note 3)............ $ 8,524 24,971 53,815 77,001
Interest on investments.......... 4,954 655 7,733 3,283
Other income..................... 9,845 - 20,858 -
---------- ---------- ---------- ----------
23,323 25,626 82,406 80,284
---------- ---------- ---------- ----------
Expenses:
Professional services to
Affiliates..................... 1,213 1,508 3,112 4,016
Professional services to
non-affiliates................. 500 1,503 19,038 20,529
General and administrative
expenses to Affiliates......... 2,617 3,864 10,575 15,538
General and administrative
expenses to non-affiliates..... 536 806 2,462 2,977
---------- ---------- ---------- ----------
4,866 7,681 35,187 43,060
---------- ---------- ---------- ----------
Net income................... $ 18,457 17,945 47,219 37,224
========== ========== ========== ==========
Net income allocated to:
General Partner.................. - 593 1,295 2,083
Limited Partners................. 18,457 17,352 45,924 35,141
---------- ---------- ---------- ----------
Net income....................... $ 18,457 17,945 47,219 37,224
========== ========== ========== ==========
Net income allocated to the one
General Partner Unit............. $ - 593 1,295 2,083
========== ========== ========== ==========
Net income per Unit, basic and
diluted, allocated to Limited
Partners per Limited Partnership
Units of 5,674.50................ $ 3.25 3.06 8.09 6.19
========== ========== ========== ==========
See accompanying notes to financial statements.
-3-
INLAND MORTGAGE INVESTORS FUND III, L.P.
(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...................................... $ 47,219 37,224
Adjustments to reconcile net income to net
cash provided by operating activities:
Changes in assets and liabilities:
Accrued interest receivable................. 6,417 1,108
Accounts payable............................ 500 -
Due to Affiliates........................... 1,628 3,381
------------ ------------
Net cash provided by operating activities......... 55,764 41,713
------------ ------------
Cash flows from investing activities:
Principal payments collected.................... 833,785 75,477
------------ ------------
Net cash provided by investing activities......... 833,785 75,477
------------ ------------
Cash flows from financing activities:
Cash distributions.............................. (486,147) (274,635)
------------ ------------
Net cash used in financing activities............. (486,147) (274,635)
------------ ------------
Net increase (decrease) in cash
and cash equivalents............................ 403,402 (157,445)
Cash and cash equivalents at beginning of period.. 93,296 219,645
------------ ------------
Cash and cash equivalents at end of period........ $ 496,698 62,200
============ ============
Supplemental schedule of non-cash investing and
financing activities:
Accrued distributions payable..................... $ 600,000 13,714
============ ============
See accompanying notes to financial statements.
-4-
INLAND MORTGAGE INVESTORS FUND III, L.P.
(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 III, L.P. (the "Partnership"), was formed in
September 1988 pursuant to the Delaware Revised Uniform Limited Partnership Act
to make or acquire loans collateralized by mortgages on improved, income
producing properties generally located in or near Chicago and other
metropolitan areas. On January 9, 1989, the Partnership commenced an Offering
of 40,000 (subject to an increase up to 50,000) Limited Partnership Units
("Units") pursuant to a Registration Statement on Form S-11 under the
Securities Act of 1933. The Offering terminated January 9, 1991, with total
sales of 5,674.50 Units, resulting in gross offering proceeds of $2,837,749,
which includes the General Partner's $500 contribution. All of the holders of
these Units were admitted to the Partnership. The Limited Partners of the
Partnership share in the benefits of ownership in proportion to the number of
Units held. 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.
The Partnership considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
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 Partnership intends to pursue
collection of all amounts currently due from the borrowers.
The Partnership believes that the interest rates associated with the mortgages
receivable approximate the market interest rates, and as such, the carrying
amount of the mortgages receivable approximate their fair value.
-5-
INLAND MORTGAGE INVESTORS FUND III, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
September 30, 1998
(unaudited)
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 $2,465 and $837 remained unpaid at September 30, 1998 and
December 31, 1997, respectively.
The General Partner was required to make Supplemental Capital Contributions, if
necessary, from time to time in sufficient amounts to allow the Partnership to
make cumulative return to the Limited Partners amounting to at least 8% per
annum on their Invested Capital through January 9, 1994. The cumulative amount
of such Supplemental Capital Contributions is $306,874, all of which has been
paid.
The Partnership has arranged for Inland Mortgage Servicing Corporation, a
subsidiary of the General Partner, to service the Partnership's mortgage loans
receivable. The 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 receivable of the Partnership. Such fees of $1,520
and $1,879 for the nine months ended September 30, 1998 and 1997, respectively,
have been incurred and paid to the subsidiary and are included in the
Partnership's general and administrative expenses to Affiliates.
-6-
INLAND MORTGAGE INVESTORS FUND III, L.P.
(a limited partnership)
Notes to Financial Statements
(continued)
September 30, 1998
(unaudited)
(3) Mortgage Loans Receivable
Mortgage loans receivable are collateralized by first mortgages on improved,
income producing properties located in Chicago, Illinois or its surrounding
metropolitan area. 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.
The borrower on the loan collateralized by the property located at 7432
Washington made additional partial paydowns on the mortgage. The Partnership
received $68,571 in 1998 and $93,429 in 1997, its proportionate share of the
total paydowns.
On June 5, 1998, the borrower on the loan collateralized by the property
located at 5540 W. 103rd Street prepaid the loan. The Partnership received
$381,904, which included all principal, accrued interest and an $11,013
prepayment penalty.
On August 14, 1998, the borrower on the loan collateralized by the property
located at 5009 and 5013 Florence Avenue, Downers Grove, Illinois prepaid the
loan. The Partnership received $405,058, which included all principal, accrued
interest and a prepayment penalty of $9,845.
(4) Subsequent Events
On October 1, 1998, an Affiliate of the Partnership purchased the final loan
collateralized by the property located at 7432 Washington for 100% of its
outstanding principal amount including accrued interest. The Partnership
received $125,752, its proportionate share of the payoff.
During October 1998, the Partnership paid a distribution of $600,000 to the
Limited Partners, all of which represents repayment proceeds.
-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 January 9, 1989, the Partnership commenced an Offering of 40,000 (subject to
an increase to 50,000) Limited Partnership Units pursuant to a Registration
Statement on Form S-11 under the Securities Act of 1933. The Offering
terminated on January 9, 1991 with total sales of 5,674.50 Units being sold to
the public at $500 per Unit resulting in gross offering proceeds of $2,837,749
which includes the General Partner's $500 contribution. The Partnership funded
seven loans between October 1990 and June 1992 utilizing $2,302,064 of capital
proceeds collected. As of September 30, 1998, cumulative distributions to the
Limited Partners totaled $3,601,916, of which $2,420,750 represents principal
amortization and repayments and $306,874 represents Supplemental Capital
Contributions from the General Partner.
As of September 30, 1998, the Partnership had cash and cash equivalents of
$496,698. The Partnership intends to use such funds to pay distributions and
for working capital requirements.
The mortgage loans receivable of the Partnership have generated sufficient cash
flow to cover the operating expenses of the Partnership. To the extent that
cash flow was insufficient to meet the minimum 8% annualized return to
investors through January 9, 1994, as well as any other financial needs, the
Partnership received Supplemental Capital Contributions from the General
Partner.
At September 30, 1998, the Partnership had one mortgage loan receivable
totaling $124,571 collateralized by the property located at 7432 Washington.
The annual interest receivable from this last asset would be insufficient to
meet the Partnership's annual operating expenses or to provide any future cash
distributions to investors. On October 1, 1998, an Affiliate of the
Partnership purchased the final loan for 100% of its outstanding principal
amount. During October 1998, the Partnership paid a distribution of $600,000
to the Limited Partners. The Partnership retained approximately $18,000 for
the payment of final bills. A final distribution will be made to investors
after the payment of all final bills.
-8-
Results of Operations
The decrease in interest on mortgage loans receivable for the three and nine
months ended September 30, 1998, as compared to the three and nine months ended
September 30, 1997, is due to the partial paydowns of the loan collateralized
by the property located at 7432 Washington in the first and fourth quarters of
1997 and the first, second and third quarters of 1998, the prepayment in June
1998 of the loan collateralized by the property located at 5540 W. 103rd Street
and the prepayment in August 1998 of the loan collateralized by the property
located at 5009 & 5013 Florence Avenue.
Other income for the three and nine months ended September 30, 1998 represents
a prepayment penalty received as a result of the prepayments of the loans
collateralized by the properties located at 5540 W. 103rd Street and 5009 &
5013 Florence Avenue.
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 a decrease in accounting services required by the
Partnership.
The decrease in general and administrative expenses to Affiliates for the three
and nine months ended September 30, 1998, as compared to the three and nine
months ended September 30, 1997, is due to a decrease in investor service
charges, mortgage servicing fees and data processing expense.
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 III, L.P.
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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