UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-11129
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BALCOR PENSION INVESTORS-III
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(Exact name of registrant as specified in its charter)
Illinois 36-3164211
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 Waukegan Road
Bannockburn, Illinois 60015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 267-1600
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(Title of class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
<PAGE>
PART I
Item 1. Business
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Balcor Pension Investors-III (the "Registrant") is a limited partnership formed
in 1982 under the laws of the State of Illinois. The Registrant raised
$118,738,000 from sales of Limited Partnership Interests. The Registrant has
retained cash reserves from the sale of its real estate investments for
contingencies which exist or may arise. The Registrant's operations currently
consist of interest income earned on short-term investments and the payment of
administrative expenses.
The Registrant originally funded thirty-two loans. A portion of the Mortgage
Reductions generated by the repayments was invested in five additional loans.
Eleven properties were acquired through foreclosure and two loans were
reclassified as investment in joint ventures with affiliates. As of December
31, 1997, the Registrant has disposed of all of these investments.
The Partnership Agreement provides for the dissolution of the Registrant upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Registrant received a repayment of the Pepper
Square Apartments loan receivable and a discounted prepayment of the Corporate
Campus I Office Building loan receivable. In addition, in 1996, the Registrant
sold its interests in the Seafirst Financial Center, Bannockburn Executive
Plaza and Carmel on Providence Apartments loans receivable. During 1996, the
Perimeter 400 Center Office Building was sold, a property in which the
Registrant held a minority joint venture interest. During 1997, the Registrant
sold its remaining two properties, the Woods Apartments and Orchards Shopping
Center. In addition, during 1997, the Brookhollow/Stemmons Center Office
Building was sold, a property in which the Registrant held a minority joint
venture interest. The Registrant has retained a portion of the cash from the
property sales to satisfy obligations of the Registrant as well as establish a
reserve for contingencies. The timing of the termination of the Registrant and
final distribution of cash will depend upon the nature and extent of
liabilities and contingencies which exist or may arise. Such contingencies may
include legal and other fees and costs stemming from litigation involving the
Registrant including, but not limited to, the lawsuit discussed in "Item 3.
Legal Proceedings". In the absence of any contingencies, the reserves will be
paid within twelve months of the last property being sold. In the event a
contingency continues to exist or arises, reserves may be held by the
Registrant for a longer period of time.
During April and June 1997, the Registrant sold the Woods Apartments and
Orchards Shopping Center in all cash sales for $10,000,000 and $7,200,000,
respectively. In addition, the Brookhollow/Stemmons Center Office Building, in
which the Registrant held a minority joint venture interest, was sold in April
1997 in an all cash sale for $12,724,000, of which $3,499,100 was the
Registrant's share. See "Item 7. Liquidity and Capital Resources" for
additional information.
The Registrant no longer has an ownership interest in any real estate. The
General Partner is not aware of any material potential liability relating to
environmental issues or conditions affecting real estate formerly owned by the
Registrant.
<PAGE>
The officers and employees of Balcor Mortgage Advisors-II, the General Partner
of the Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.
Item 2. Properties
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As of December 31, 1997, the Registrant did not own any properties.
In the opinion of the General Partner, the Registrant has obtained adequate
insurance coverage.
See Notes to Financial Statements for other information regarding former real
property investments.
Item 3. Legal Proceedings
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Dee vs. Walton Street Capital Acquisition II, LLC
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On June 14, 1996, a proposed class and derivative action complaint was filed,
Dee vs. Walton Street Capital Acquisition II, LLC (Circuit Court of Cook
County, Illinois, County Department, Chancery Division ("Chancery Court"), Case
No. 96 CH 06283) (the "Dee Case"), naming the General Partner and the general
partners (the "Balcor Defendants") of nine other limited partnerships sponsored
by The Balcor Company (together with the Registrant, the "Affiliated
Partnerships"), as well as the Affiliated Partnerships, as defendants.
Additional defendants were Insignia Management Group ("Insignia") and Walton
Street Capital Acquisition II, LLC ("Walton"") and certain of their affiliates
and principals (collectively, the "Walton and Insignia Defendants"). The
complaint alleged, among other things, that the tender offers for the purchase
of limited partnership interests in the Affiliated Partnerships made by a joint
venture consisting of affiliates of Insignia and Walton were coercive and
unfair.
On July 1, 1996, another proposed class action complaint was filed in the
Chancery Court, Anderson vs. Balcor Mortgage Advisors (Case No. 96 CH 06884)
(the "Anderson Case"). An amended complaint consolidating the Dee and Anderson
Cases (the "Dee/Anderson Case") was filed on July 25, 1996.
The complaint seeks to assert class and derivative claims against the Walton
and Insignia Defendants and alleges that, in connection with the tender offers,
the Walton and Insignia Defendants misused the Balcor Defendants' and
Insignia's fiduciary positions and knowledge in breach of the Walton and
Insignia Defendants' fiduciary duty and in violation of the Illinois Securities
and Consumer Fraud Acts. The plaintiffs amended their complaint on October 8,
1996, adding additional claims. The plaintiffs requested certification as a
class and derivative action, unspecified compensatory damages and rescission of
the tender offers. Each of the defendants filed motions to dismiss the
complaint for failure to state a cause of action. On January 7, 1997, the
Chancery Court denied the plaintiffs' motion for leave to amend the complaint
and dismissed the matter for failure to state a cause of action, with
prejudice.
<PAGE>
On February 3, 1997, the plaintiffs filed a Notice of Appeal of the Chancery
Court's order to the Appellate Court of Illinois. Plaintiff's brief was filed
with the Appellate Court in September 1997. Defendants filed their reply briefs
in January 1998. Oral arguments before the Appellate Court were held on March
18, 1998. The Appellate Court is expected to issue its opinion in the spring of
1998, although there can be no assurances on such date.
The Balcor Defendants intend to vigorously contest this action. No class has
been certified as of this date. The Registrant believes it has meritorious
defenses to contest the claims. It is not determinable at this time whether or
not an unfavorable decision in this action would have a material adverse impact
on the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of the Limited Partners of the Registrant
during 1997.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
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Matters
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There has not been an established public market for Limited Partnership
Interests and it is not anticipated that one will develop. For information
regarding previous distributions, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
As of December 31, 1997, the number of record holders of Limited Partnership
Interests of the Registrant was 9,528.
Item 6. Selected Financial Data
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Year ended December 31,
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1997 1996 1995 1994 1993
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Total income $1,752,573 $9,867,879 $7,464,674 $7,904,391 $6,125,896
Recovery of losses
on loans and
accrued interest
receivable None 3,475,817 756,370 None None
Provision for
losses on loans
and accrued inter-
est receivable None None 756,370 600,000 2,720,000
Income before
gains on sales of
assets and extra-
ordinary item 1,383,045 9,170,726 6,001,706 6,379,013 2,541,797
Net income 3,850,751 10,489,409 8,542,352 6,498,855 3,141,300
Net income per
average number of
Limited Partner-
ship Interests
outstanding - Basic
and Diluted 17.81 35.60 34.90 26.35 12.68
Total assets 8,132,457 37,934,990 48,074,826 77,868,675 81,568,277
Mortgage notes
payable None 1,622,593 1,666,291 7,153,074 8,436,279
Distributions per
Limited Partner-
ship Interest(A) 142.20(B) 87.34 132.12 34.35 20.00
(A) These amounts include distributions of Original Capital of $114.20, $58.84
and $109.12 per Limited Partnership Interest for the years 1997, 1996 and 1995,
respectively.
<PAGE>
(B) In addition to the above amounts, a special distribution of $0.33 per
Interest was paid to class members including certain current investors in the
Partnership pursuant to the settlement of a class action lawsuit.
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Operations
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Summary of Operations
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During 1997, Balcor Pension Investors-III (the "Partnership") recognized gains
related to the sales of its two remaining properties. In addition, in 1997 and
1996 the Partnership recognized its share of the gains on the sales of the
properties held by joint ventures with affiliates in which the Partnership held
minority interests. During 1996, the Partnership recognized a recovery of
losses related to certain of the Partnership's loans and recognized a gain on
the sale of two loans. The combined effect of these events resulted in a
decrease in net income during 1997 as compared to 1996 and an increase in net
income during 1996 as compared to 1995. During 1995, the Partnership recognized
gains related to the sales of two properties, which partially offset the 1996
increase in net income. Further discussion of the Partnership's operations is
summarized below.
1997 Compared to 1996
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Operations of real estate held for sale represent the net operations of the
properties acquired by the Partnership through foreclosure. The Partnership
sold the Woods Apartments and Orchards Shopping Center in April and June 1997,
respectively, both of which were generating income prior to their sales. The
timing of these sales resulted in a decrease in income from operations of real
estate held for sale during 1997 as compared to 1996. During 1997, the
Partnership recognized gains of $2,246,137 and $256,961 in connection with the
sales of the Woods Apartments and the Orchards Shopping Center, respectively.
Participation in income of joint ventures with affiliates represented the
Partnership's 27.5% and 12.68% shares of income from the Brookhollow/Stemmons
and Perimeter 400 office buildings, respectively. In 1997 and 1996, the joint
ventures sold the Brookhollow/Stemmons Center Office Building and the Perimeter
400 Center Office Building, respectively. The Partnership's share of the gain
on the sale of the Perimeter 400 Center Office Building was higher than the
gain recognized in connection with the sale of the Brookhollow/Stemmons Center,
which resulted in a decrease in participation in income of joint ventures with
affiliates in 1997 as compared to 1996.
Due to higher average cash balances during 1997 as a result of the timing of
the distribution of the proceeds received in connection with the 1996 sale of
the Carmel on Providence loan and 1997 sales of the Woods Apartments, the
Orchards Shopping Center and the Brookhollow/Stemmons Office Building, interest
income on short-term investments increased during 1997 as compared to 1996.
<PAGE>
The Partnership recognized other income during 1997 in connection with a refund
of prior years' insurance premiums relating to the Partnership's properties and
a real estate tax refund related to the Crossings Shopping Center.
Provisions for potential losses were charged to income when the General Partner
believed an impairment had occurred to the value of its properties or in a
borrower's ability to repay a loan or in the value of the collateral property.
Determinations of fair value were made periodically on the basis of performance
under the terms of the loan agreement, assessments of property operations and
the property's estimated sales prices less closing costs. Determinations of
fair value represented estimations based on many variables which affected the
value of real estate, including economic and demographic conditions. The
Partnership did not recognize any provisions for potential losses related to
its loans or real estate held for sale during 1997 or 1996. During 1996 the
Partnership recognized recoveries of $3,475,817 related to its loans. In
addition, allowances of $467,813 related to the Corporate Campus I Office
Building loan were written off in connection with the loan repayment during
1996.
Consulting, postage and printing costs incurred in connection with a response
to a tender offer during 1996 resulted in a decrease in administrative expenses
during 1997 as compared to 1996. Lower legal fees in 1997 also contributed to
the decrease. The decrease was partially offset by a payment made during 1997
by the General Partner relating to the settlement of certain litigation to
original investors who previously sold their Interests in the Partnership,
which was recognized as an administrative expense.
During 1996, the Partnership recognized gains of $392,954 and $925,729 in
connection with the sales of its interests in the Bannockburn Executive Plaza
and Carmel on Providence Apartments loans, respectively.
In connection with the June 1997 sale of the Orchards Shopping Center, the
Partnership paid a prepayment penalty of $32,063 and wrote off the remaining
unamortized deferred expenses of $3,329. These amounts were recognized as an
extraordinary item and classified as debt extinguishment expense.
1996 Compared to 1995
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The repayments and sales of five loans during 1996 and two loans during 1995
resulted in a decrease of approximately $1,473,000 in net interest income on
loans receivable during 1996 as compared to 1995. Deferred interest income of
approximately $406,000 received in connection with the 1996 sale of the
Partnership's interest in the Seafirst Financial Center loan was recognized as
interest income and partially offset the decrease in net interest income on
loans receivable due to the repayments and sales. The repayments and sales of
the Partnership's remaining five loans during 1996 caused net interest income
on loans receivable to cease during 1996.
During 1996, the Partnership sold the two loans collateralized by Carmel on
Providence Apartments and Bannockburn Executive Plaza, which were nonaccrual
status prior to their sales. For nonaccrual loans, income was recorded only as
cash payments were received from the borrower. The funds advanced by the
Partnership for these two loans totaled approximately $6,200,000, representing
<PAGE>
approximately 6% of original funds advanced. During 1996, the Partnership
received cash payments of net interest income totaling approximately $384,000
on the Carmel on Providence loan. The Partnership would have received
approximately $330,000 of net interest income under the terms of the original
loan agreement. Of the net interest income received, $54,000 related to costs
incurred by the Partnership prior to the borrower's bankruptcy filing, which
were added to the principal of the loan and which accrued interest, payable by
the borrower on a quarterly basis. In addition, approximately $457,000 was
received on the Bannockburn Executive Plaza loan.
At December 31, 1996, the Partnership was operating the Woods Apartments and
the Orchards Shopping Center. Original funds advanced by the Partnership total
approximately $6,678,000 for these two properties, representing approximately
6% of original funds advanced. The sale of the Crossings Shopping Center and
the Candlewyck Apartments in 1995, both of which had been generating income for
the year, and decreased rental and service income at the Orchards Shopping
Center during 1996, resulted in a decrease of approximately $217,000 in income
from real estate held for sale during 1996 as compared to 1995. Improved
operations at the Woods Apartments of approximately $202,000 resulting
primarily from increased rental rates and decreased repair and maintenance
expenses due to the completion of structural repairs and exterior painting
during 1995, substantially offset this decrease.
In December 1996, the joint venture sold the Perimeter 400 Center Office
Building and the Partnership recognized its share of the gain on sale. This was
the primary reason for the increase in participation in income of joint
ventures with affiliates during 1996 as compared to 1995.
Proceeds received in connection with the 1995 and 1994 loan repayments and
property sales were invested in short-term investments and subsequently
distributed to Limited Partners in 1995 and January 1996. This, along with
lower average interest rates on short-term interest bearing instruments in
1996, resulted in a decrease in interest income on short-term investments
during 1996 as compared to 1995.
During 1995, the Partnership recognized a provision and recovery of $756,370
related to one of its loans. Allowances of $1,070,329 related to the Colony
Apartments loan were written off in connection with the loan repayment during
1995.
During 1995, the Partnership incurred legal, consulting, printing and postage
costs in connection with its response to a tender offer. As a result,
administrative expenses decreased by approximately $164,000 during 1996 as
compared to 1995. During 1996, the Partnership incurred legal, consulting,
printing and postage costs of approximately $155,000 in connection with its
response to 1996 tender offers, which substantially offset the decrease.
During 1995, the Partnership recognized gains of $717,900 and $1,822,746 in
connection with the sales of the Crossings Shopping Center and the Candlewyck
Apartments, respectively.
Liquidity and Capital Resources
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<PAGE>
The cash position of the Partnership decreased by approximately $15,486,000 as
of December 31, 1997 when compared to December 31, 1996 primarily due to the
payment of distributions to Limited Partners in January 1997 from the remaining
available 1996 property and loan sale proceeds. The Partnership generated cash
totaling approximately $343,000 from its operating activities primarily from
the revenue generated from property operations and interest income received on
short-term investments, which was partially offset by the payment of
administrative expenses and expenses related to certain of the Partnership's
loans sold during 1996. The Partnership generated cash from investing
activities consisting of net proceeds received in connection with the sales of
the Woods Apartments and the Orchards Shopping Center of approximately
$16,718,000 and net distributions from joint ventures with affiliates of
approximately $3,692,000 primarily representing the Partnership's share of the
proceeds received from the sale of the Brookhollow/Stemmons Center Office
Building. The Partnership's financing activities consisted of the payment of
distributions to the Partners of approximately $31,332,000, an increase in
restricted cash and cash equivalents of approximately $3,364,000 due to the
discontinuance of the repurchase of Interests from Limited Partners in 1997, a
contribution by the General Partner to the Partnership in settlement of
litigation of approximately $79,000, the repayment of the mortgage note payable
of approximately $1,603,000 and principal payments on the mortgage note payable
of approximately $19,000. In addition, in January 1998, the Partnership made a
distribution to Limited Partners of $1,833,315, as discussed below.
The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Partnership received a repayment of the Pepper
Square Apartments loan receivable and a discounted prepayment of the Corporate
Campus I Office Building loan receivable. In addition, in 1996, the Partnership
sold its interest in the Seafirst Financial Center, Bannockburn Executive Plaza
and Carmel on Providence Apartments loans receivable. During 1996, the
Perimeter 400 Center Office Building was sold, a property in which the
Partnership held a minority joint venture interest. During April and June 1997,
the Partnership sold its remaining two properties, the Woods Apartments and
Orchards Shopping Center, respectively. In addition, during April 1997, the
Brookhollow/Stemmons Center Office Building was sold, a property in which the
Partnership held a minority joint venture interest. The Partnership has
retained a portion of the cash from the property sales to satisfy obligations
of the Partnership as well as establish a reserve for contingencies. The timing
of the termination of the Partnership and final distribution of cash will
depend upon the nature and extent of liabilities and contingencies which exist
or may arise. Such contingencies may include legal and other fees and costs
stemming from litigation involving the Partnership including, but not limited
to, the lawsuit discussed in "Item 3. Legal Proceedings". In the absence of any
contingency, the reserves will be paid within twelve months of the last
property being sold. In the event a contingency continues to exist or arises,
reserves may be held by the Partnership for a longer period of time.
In April 1997, the Partnership sold the Woods Apartments in an all cash sale
for $10,000,000. From the proceeds of the sale, the Partnership paid $230,158
in selling costs. Pursuant to the terms of the sale, $200,000 of the proceeds
were retained by the Partnership until June 1997, at which time the funds were
<PAGE>
released in full. The available proceeds were distributed to the Limited
Partners in July 1997. See Note 13 of Notes to the Financial Statements for
additional information.
In June 1997, the Partnership sold the Orchards Shopping Center in an all cash
sale for $7,200,000. From the proceeds of the sale, the Partnership paid
$1,603,132 to the third party mortgage holder in full satisfaction of the first
mortgage loan, $252,039 in selling costs and $32,063 in prepayment penalties.
The available proceeds were distributed to the Limited Partners in July 1997.
See Note 13 of Notes to the Financial Statements for additional information.
The Brookhollow/Stemmons Office Building was owned by a joint venture
consisting of the Partnership and an affiliate. In April 1997, the General
Partner sold the property in an all cash sale for $12,724,000. From the
proceeds of the sale, the joint venture paid $340,293 in selling costs. The net
proceeds of the sale were $12,383,707, of which $3,405,519 was the
Partnership's share. The available proceeds received by the Partnership were
distributed to the Limited Partners in July 1997. Pursuant to the terms of the
sale, $250,000 of the sales proceeds were placed in an escrow and were not to
be disbursed to the joint venture until the earlier of the settlement of any
claims presented by the purchaser or October 1997. The funds were released in
full in October 1997 and the Partnership's share of these funds was $68,750.
See Notes 10 and 18 of Notes to Financial Statements for additional
information.
The Perimeter 400 Center Office Building was owned by a joint venture
consisting of the Partnership and three affiliates. During December 1996, the
joint venture sold the property. Pursuant to the terms of the sale, the joint
venture was required to retain $1,750,000 of the sale proceeds until September
1997, at which time the funds were released in full. The Partnership's share of
the proceeds was $221,900.
In February 1997, the General Partner made a settlement payment of $71,243
($.33 per Interest) to members of the class pursuant to the settlement approved
by the court in November 1996 in the Paul Williams and Beverly Kennedy et. al.
v. Balcor Pension Investors, et. al. class action lawsuit. The General Partner
made a contribution of $79,159 to the Partnership, of which the plaintiffs'
attorney received $7,916 pursuant to the settlement agreement. Of the remaining
settlement amount, $30,670 was paid to original investors who held their
Limited Partnership Interests at the date of the settlement and was recorded as
a distribution to Limited Partners in the Financial Statements. The remaining
portion of the settlement of $40,573 was paid to original investors who
previously had sold their Interests in the Partnership. This amount was
recorded as an administrative expense in the Financial Statements. Similar
contributions and payments were made on the seven other partnerships included
in the lawsuit in addition to those payments described above. The Balcor
Company paid an additional $635,000 to the plaintiffs' class counsel and The
Balcor Company received approximately $946,000 from the eight partnerships as a
reimbursement of its legal expenses, of which $93,636 was the Partnership's
share.
In February 1997, the Partnership discontinued the repurchase of Interests from
Limited Partners. As of December 31, 1997, there were 21,249 Interests and
cash of $4,520,005 in the Early Investment Incentive Fund.
<PAGE>
The Partnership made three distributions totaling $142.20 per Interest in 1997
and made four distributions totaling $87.34 and $132.12 per Interest in 1996
and 1995, respectively. See Statements of Partners' Capital for additional
information. Distributions were comprised of $28.00 of Cash Flow and $114.20 of
Mortgage Reductions in 1997, $28.50 of Cash Flow and $58.84 of Mortgage
Reductions in 1996 and $23.00 of Cash Flow and $109.12 of Mortgage Reductions
in 1995.
In January 1998, the Partnership made a distribution of $1,833,315 ($7.72 per
Interest) to the holder of Limited Partnership Interests consisting of
available Cash Flow reserves of $7.43 per Interest and available Mortgage
Reductions of $.29 per Interest from the Partnership's share of the holdback on
the Brookhollow/Stemmons Center Office Building. Including the January 1998
distribution, Limited Partners have received cash distributions totaling
$878.18 per $500 Interest. Of this amount, $510.73 represents Cash Flow from
operations and $367.45 represents a return of Original Capital. In January
1998, the Partnership also paid $147,037 to the General Partner as its
distributive share of Cash Flow distributed for the fourth quarter of 1997 and
made a contribution to the Early Investment Incentive Fund in the amount of
$49,013. No additional distributions are anticipated to be made prior to the
termination of the Partnership. However, after paying final partnership
expenses, any remaining cash reserves will be distributed.
Item 8. Financial Statements and Financial Statement Schedules and
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Supplementary Data
- ------------------
See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
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Financial Disclosure
- --------------------
There have been no changes in or disagreements with accountants on any matters
of accounting principles, practices or financial statement disclosures.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
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(a) Neither the Registrant nor Balcor Mortgage Advisors-II, its General
Partner, has a Board of Directors.
(b, c & e) The names, ages and business experiences of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:
TITLE OFFICERS
Chairman, President and Chief Thomas E. Meador
Executive Officer
Senior Vice President Alexander J. Darragh
Senior Vice President John K. Powell, Jr.
Senior Managing Director, Chief Jayne A. Kosik
Financial Officer, Treasurer
and Assistant Secretary
Thomas E. Meador (age 50) joined Balcor in July 1979. He is Chairman,
President and Chief Executive Officer and has responsibility for all ongoing
day-to-day activities at Balcor. He is a member of the board of directors of
The Balcor Company. He is also Senior Vice President of American Express
Company and is responsible for its real estate operations worldwide. Prior to
joining Balcor, Mr. Meador was employed at the Harris Trust and Savings Bank in
the commercial real estate division where he was involved in various lending
activities. Mr. Meador received his M.B.A. degree from the Indiana University
Graduate School of Business.
Alexander J. Darragh (age 43) joined Balcor in September 1988 and is
responsible for real estate advisory services for Balcor and American Express
Company. Mr. Darragh received masters' degrees in Urban Geography from Queen's
University and in Urban Planning from Northwestern University.
John K. Powell Jr. (age 47) joined Balcor in September 1985 and is responsible
for portfolio and asset management matters relating to Balcor's partnerships.
Mr. Powell also has supervisory responsibility for Balcor's risk management
function. He is a member of the board of directors of The Balcor Company. He
received a Master of Planning degree from the University of Virginia. Mr.
Powell has been designated a Certified Real Estate Financier by the National
Society for Real Estate Finance and is a full member of the Urban Land
Institute.
Jayne A. Kosik (age 40) joined Balcor in August 1982 and, as Chief Financial
Officer, is responsible for Balcor's financial, human resources and treasury
functions. From June 1989 until October 1996, Ms. Kosik had supervisory
responsibility for accounting functions relating to Balcor's public and private
partnerships. She is also Treasurer and a Senior Managing Director of The
Balcor Company. Ms. Kosik is a Certified Public Accountant.
(d) There is no family relationship between any of the foregoing officers.
<PAGE>
(f) None of the foregoing officers or employees are currently involved in any
material legal proceedings nor were any such proceedings terminated during the
fourth quarter of 1997.
Item 11. Executive Compensation
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The Registrant paid $3,323 in 1997 with respect to one of the executive
officers and directors of Balcor Mortgage Advisors-II, the General Partner. The
Registrant has not paid and does not propose to pay any remuneration to the
remaining executive officers and directors of the General Partner. The other
officers receive compensation from The Balcor Company (but not from the
Registrant) for services performed for various affiliated entities, which may
include services performed for the Registrant. However, the General Partner
believes that any such compensation attributable to services performed for the
Registrant is immaterial to the Registrant. See Note 9 of Notes to Financial
Statements for information relating to transactions with affiliates.
Item 12. Security Ownership of Certain Beneficial Owners and Management
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(a) No person is known of record or is known by the Registrant to own
beneficially more than 5% of the outstanding Limited Partnership Interests of
the Registrant.
(b) The Registrant, through the Early Investment Incentive Fund, Balcor
Mortgage Advisors-II and their officers and partners own as a group the
following Limited Partnership Interests of the Registrant:
Amount
Beneficially
Title of Class Owned Percent of Class
-------------- ------------- ----------------
Limited Partnership
Interests 21,254 Interests 9.8%
Relatives of the officers and affiliates of the partners of the General Partner
do not own any additional interests.
(c) The Registrant is not aware of any arrangement, the operations of which may
result in a change of control of the Registrant.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
(a, b) See Note 4 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.
See Note 9 of Notes to Financial Statements for information relating to
transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Financial Statement Schedules,
- --------------------------------------------------------------------------
and Reports on Form 8-K
- -----------------------
(a)
(1 & 2) See Index to Financial Statements in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement of Limited Partnership, and the Amended
and Restated Certificate of Limited Partnership of Balcor Pension
Investors-III, previously filed as Exhibits 3(a) and 3(b), respectively, to
Amendment No. 2 to the Registrant's Registration Statement on Form S-11 dated
May 20, 1982 (Registration No. 2-75938), and as Exhibits 3(a) and 3(b),
respectively, to the Registrant's Registration Statement on Form S-11 dated
November 2, 1982 (Registration No. 2-80123), are hereby incorporated herein by
reference.
(4) Form of Subscription Agreement, previously filed as Exhibit 4(a) to
Amendment No. 2 to the Registrant's Registration Statement on Form S-11 dated
May 20, 1982 (Registration Statement No. 2-75938) and as previously filed as
Exhibit 4(a) to Registrant's Registration Statement on Form S-11 dated
November 2, 1982 (Registration No. 2-80123), and Form of Confirmation regarding
Interests in the Registrant set forth as Exhibit 4.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 are
incorporated herein by reference.
(10)(i)(a) Purchase and Sale Agreement regarding the sale of the Registrant's
interest in the Bannockburn Executive Plaza loan, previously filed as Exhibit
(10)(i) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, is incorporated herein by reference.
(i)(b) First Amendment to Sale Agreement regarding the sale of the Registrant's
interest in the Bannockburn Executive Plaza loan previously reported as Exhibit
(10)(i)(b) to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, is hereby incorporated herein by reference.
(ii) Purchase and Sale Agreement regarding the sale of the Registrant's
interest in the Seafirst Financial Center loan, previously filed as
Exhibit(10)(ii) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, is incorporated herein by reference.
(iii)(a) Agreement of Sale dated March 12, 1997 relating to the sale of the
Woods Apartments, Austin, Texas, previously filed as Exhibit (2)(b) to the
Registrant's Current Report on Form 8-K dated March 12, 1997 is incorporated
herein by reference.
(iii)(b) Letter Agreement dated March 20, 1997 relating to the sale of the
Woods Apartments, Austin, Texas, previously filed as Exhibit (2)(c) to the
Registrant's Current Report on Form 8-K dated December 18, 1996 is incorporated
herein by reference.
<PAGE>
(iii)(c) Letter of Agreement dated March 14, 1997 relating to the sale of the
Woods Apartments, Austin, Texas, previously filed as Exhibit (99)(i) to the
Registrant's Current Report on Form 8-K dated March 14, 1997 is incorporated
herein by reference.
(iii)(d) Letter Agreement dated June 30, 1997 relating to the sale of the Woods
Apartments, Austin, Texas, previously filed as Exhibit (99)(ii) to the
Registrant's Current Report on Form 8-K dated March 14, 1997 is incorporated
herein by reference.
(iii)(e) Letter Agreement dated April 3, 1997 relating to the sale of the Woods
Apartments, Austin, Texas, previously filed as Exhibit (99)(iii) to the
Registrant's Current Report on Form 8-K dated March 14, 1997 is incorporated
herein by reference.
(iv)(a) Agreement of Sale relating to the sale of the Brookhollow/Stemmons
Center Office Building, Dallas, Texas previously filed as Exhibit (2) to the
Registrant's Current Report on Form 8-K dated March 14, 1997 is incorporated
herein by reference.
(iv)(b) Amendment No. 1 to Agreement of Sale relating to the sale of
Brookhollow/Stemmons Center Office Building, Dallas, Texas, previously filed as
Exhibit (10)(iv)(b) to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 1997, is incorporated herein by reference.
(v) Agreement of Sale relating to the sale of Orchards Shopping Center,
Loveland, Colorado, previously filed as Exhibit (2) to the Registrant's Current
Report on Form 8-K dated April 14, 1997 is incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1997 is attached hereto.
(b) Reports on Form 8-K: No Reports were filed on Form 8-K during the quarter
ended December 31, 1997.
(c) Exhibits: See Item 14(a)(3) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BALCOR PENSION INVESTORS-III
By: /s/Jayne A. Kosik
-------------------------------------
Jayne A. Kosik
Senior Managing Director and Chief
Financial Officer (Principal Accounting
Officer) of Balcor
Mortgage Advisors-II, the General Partner
Date: March 27, 1998
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ---------------------- ------------------------------------------------
President and Chief Executive
Officer (Principal Executive
Officer) of Balcor Mortgage
/s/Thomas E. Meador Advisors-II, the General Partner March 27, 1998
-------------------- --------------
Thomas E. Meador
Senior Managing Director and Chief
Financial Officer (Principal
Accounting Officer) of Balcor
Mortgage Advisors-II, the
/s/Jayne A .Kosik General Partner March 27, 1998
- ------------------- --------------
Jayne A. Kosik
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1997 and 1996
Statements of Partners' Capital, for the years ended December 31, 1997, 1996
and 1995
Statements of Income and Expenses, for the years ended December 31, 1997, 1996
and 1995
Statements of Cash Flows, for the years ended December 31, 1997, 1996 and 1995
Notes to Financial Statements
Financial Statement Schedules are omitted for the reason that they are
inapplicable or equivalent information has been included elsewhere herein.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Balcor Pension Investors-III:
We have audited the accompanying financial statements of Balcor Pension
Investors-III (An Illinois Limited Partnership) as listed in the Index of this
Form 10-K. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Balcor Pension Investors-III
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
As described in Note 2 to the financial statements, the partnership agreement
provides for the dissolution of the Partnership upon the disposition of all its
real estate interests. As of December 31, 1997, the Partnership has disposed of
all of its remaining real estate assets. Upon resolution of the litigation
described in Note 16 to the financial statements, the Partnership intends to
cease operations and dissolve.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 25, 1998
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
------------- -------------
Cash and cash equivalents $ 3,558,254 $ 19,044,458
Cash and cash equivalents - Early
Investment Incentive Fund 4,520,005 1,156,294
Escrow deposits 126,507
Accounts and accrued interest receivable 54,198 98,863
Prepaid expenses 33,582
Deferred expenses, net of accumulated
amortization of $53,115 in 1996 9,373
------------- -------------
8,132,457 20,469,077
------------- -------------
Real estate held for sale 14,214,705
Investment in joint ventures with affiliates 3,251,208
-------------
17,465,913
------------- -------------
$ 8,132,457 $ 37,934,990
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 33,055 $ 310,198
Due to affiliates 41,705 74,164
Other liablilities, principally real
estate taxes and escrow deposits 384,433
Security deposits 83,571
Mortgage note payable 1,622,593
------------- -------------
Total liabilities 74,760 2,474,959
------------- -------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
BALANCE SHEETS
December 31, 1997 and 1996
(Continued)
1997 1996
------------- -------------
Commitments and contingencies
Limited Partners' capital (237,476
Interests issued) 14,686,267 41,613,648
Less Interests held by Early Investment
Incentive Fund (21,249 at December 31, 1997
and 1996) (7,024,362) (7,024,362)
------------- -------------
7,661,905 34,589,286
General Partner's capital 395,792 870,745
------------- -------------
Total partners' capital 8,057,697 35,460,031
------------- -------------
$ 8,132,457 $ 37,934,990
============= =============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
for the years ended December 31, 1997, 1996 and 1995
Partners' Capital (Deficit) Accounts
------------------------------------------------
General Limited
Total Partner Partners
-------------- --------------- --------------
Balance at December 31,
1994 $ 68,823,059 $ (1,405,761) $ 70,228,820
Repurchase of 5,882
Limited Partnership
Interests (1,426,239) (1,426,239)
Cash distributions to:
Limited Partners (A) (29,836,901) (29,836,901)
General Partner (455,163) (455,163)
Net income for the year
ended December 31, 1995 8,542,352 640,676 7,901,676
-------------- --------------- --------------
Balance at December 31,
1995 45,647,108 (1,220,248) 46,867,356
Repurchase of 5,159
Limited Partnership
Interests (983,513) (983,513)
Cash distributions to:
Limited Partners (A) (19,128,967) (19,128,967)
General Partner (564,006) (564,006)
Net income for the year
ended December 31, 1996 10,489,409 2,654,999 7,834,410
-------------- --------------- --------------
Balance at December 31,
1996 35,460,031 870,745 34,589,286
Cash distributions to:
Limited Partners (A) (30,778,132) (30,778,132)
General Partner (554,112) (554,112)
Cash contribution 79,159 79,159
Net income for the year
ended December 31, 1997 3,850,751 3,850,751
-------------- --------------- --------------
Balance at December 31,
1997 $ 8,057,697 $ 395,792 $ 7,661,905
============== =============== ==============
(A) Summary of cash distributions paid per Limited Partnership Interest:
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
-------------- --------------- --------------
First Quarter $ 44.00 (B) $ 26.96 $ 4.00
Second Quarter 20.20 4.00 29.00
Third Quarter 78.00 10.38 35.94
Fourth Quarter None 46.00 63.18
(B) In addition to the above distribution, a special distribution of
$0.33 per Interest was made to class members including certain current
investor in the Partnership pursuant to the settlement of a class action
lawsuit.
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
-------------- --------------- --------------
Income:
Interest on loans
receivable $ 4,553,996 $ 7,163,288
Less interest on loans
payable - underlying
mortgages 2,157,804 3,700,302
--------------- --------------
Net interest income on
loans receivable 2,396,192 3,462,986
Income from operations
of real estate held
for sale $ 605,761 1,462,922 1,478,073
Participation in income
of joint ventures
with affiliates 441,062 2,029,975 859,887
Interest on short-term
investments 674,748 502,973 907,358
Other income 31,002
Recovery of losses on
loans and accrued
interest receivable 3,475,817 756,370
-------------- --------------- --------------
Total income 1,752,573 9,867,879 7,464,674
-------------- --------------- --------------
Expenses:
Provision for potential
losses on loans and
accrued interest
receivable 756,370
Administrative 369,528 697,153 706,598
-------------- --------------- --------------
Total expenses 369,528 697,153 1,462,968
-------------- --------------- --------------
Income before gains on
sales of loans
receivable and real
estate and extraordinary
item 1,383,045 9,170,726 6,001,706
Gains on sales of loans
receivable 1,318,683
Gains on sales of real
estate 2,503,098 2,540,646
-------------- --------------- --------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
-------------- --------------- --------------
Income before
extraordinary item 3,886,143 10,489,409 8,542,352
Extraordinary item:
Debt extinguishment
expenses (35,392)
-------------- --------------- --------------
Net income $ 3,850,751 $ 10,489,409 $ 8,542,352
============== =============== ==============
Income before
extraordinary item
allocated to General
Partner None $ 2,654,999 $ 640,676
============== =============== ==============
Income before
extraordinary item
allocated to Limited
Partners $ 3,886,143 $ 7,834,410 $ 7,901,676
============== =============== ==============
Income before
extraordinary item per
average number of
Limited Partnership
Interests outstanding
(216,227 in 1997,
220,064 in 1996 and
226,389 in 1995)- Basic
and Diluted $ 17.97 $ 35.60 $ 34.90
============== =============== ==============
Extraordinary item
allocated to General
Partner None None None
============== =============== ==============
Extraordinary item
allocated to
Limited Partners $ (35,392) None None
============== =============== ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
-------------- --------------- --------------
Extraordinary item per
average number of
Limited Partnership
Interests outstanding
(216,227 in 1997,
220,064 in 1996 and
226,389 in 1995) -
Basic and Diluted $ (0.16) None None
============== =============== ==============
Net income allocated to
General Partner None $ 2,654,999 $ 640,676
============== =============== ==============
Net income allocated to
Limited Partners $ 3,850,751 $ 7,834,410 $ 7,901,676
============== =============== ==============
Net income per average
number of Limited
Partnership Interests
outstanding (216,227 in
1997, 220,064 in 1996
and 226,389 in 1995) -
Basic and Diluted $ 17.81 $ 35.60 $ 34.90
============== =============== ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
-------------- --------------- --------------
Operating activities:
Net income $ 3,850,751 $ 10,489,409 $ 8,542,352
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Gains on sales of
loans receivable (1,318,683)
Gains on sales of
real estate (2,503,098) (2,540,646)
Debt extinguishment
expense 3,329
Participation in
income of joint
ventures
with affiliates (441,062) (2,029,975) (859,887)
Recovery of losses
on loans and
accrued interest
receivable (3,475,817) (756,370)
Provision for
potential losses
on loans and
accrued interest
receivable 756,370
Amortization of
deferred expenses 6,044 12,497 12,498
Net change in:
Escrow deposits 126,507 497 300,558
Escrow deposits -
restricted 899,929
Accounts and
accrued interest
receivable 44,665 123,554 64,339
Prepaid expenses 33,582 (1,685) (31,897)
Accounts payable (277,143) 208,743 (18,028)
Due to affiliates (32,459) 38,153 (74,851)
Other liabilities (384,433) (149,680) (1,007,214)
Security deposits (83,571) (6,277) (31,022)
-------------- --------------- --------------
Net cash provided by
operating activities 343,112 3,890,736 5,256,131
-------------- --------------- --------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
-------------- --------------- --------------
Investing activities:
Distributions from joint
venture partners -
affiliates $ 3,759,861 $ 5,262,527 $ 399,211
Capital contribution to
joint venture
partners - affiliate (67,591)
Collection of principal
payments on loans
receivable 4,362,969 13,590,567
Additions to real estate (60,698)
Proceeds from sales of
loans receivable 16,947,490
Costs incurred in
connection with
sales of loans
receivable (587,808)
Proceeds from sales of
real estate 17,200,000 10,856,240
Costs incurred in
connection with
sales of real estate (482,197) (461,794)
-------------- --------------- --------------
Net cash provided by
investing activities 20,410,073 25,985,178 24,323,526
-------------- --------------- --------------
Financing activities:
Distributions to Limited
Partners (30,778,132) (19,128,967) (29,836,901)
Distributions to General
Partner (554,112) (564,006) (455,163)
Contribution by General
Partner 79,159
Increase in cash
and cash equivalents -
Early Investment
Incentive Fund (3,363,711) (853,857) (281,266)
Repurchase of Limited
Partnership Interests (983,513) (1,426,239)
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
-------------- --------------- --------------
Principal payments on
underlying loans
payable (602,363) (987,626)
Repayment of mortgage
notes payable (1,603,132) (3,545,699)
Principal payments on
mortgage notes payable (19,461) (43,698) (147,324)
-------------- --------------- --------------
Net cash used in
financing activities (36,239,389) (22,176,404) (36,680,218)
-------------- --------------- --------------
Net change in cash and
cash equivalents (15,486,204) 7,699,510 (7,100,561)
Cash and cash equivalents
at beginning of year 19,044,458 11,344,948 18,445,509
-------------- --------------- --------------
Cash and cash equivalents
at end of year $ 3,558,254 $ 19,044,458 $ 11,344,948
============== =============== ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Pension Investors-III (the "Partnership") has retained cash reserves
from the sale of its real estate investments for contingencies which exist or
may arise. The Partnership's operations currently consist of interest income
earned on short-term investments and the payment of administrative expenses.
2. Partnership Termination:
The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Partnership received a repayment of the Pepper
Square Apartments loan receivable and a discounted prepayment of the Corporate
Campus I Office Building loan receivable. In addition, in 1996, the Partnership
sold its interest in the Seafirst Financial Center, Bannockburn Executive Plaza
and Carmel on Providence Apartments loans receivable. During 1996, the
Perimeter 400 Center Office Building was sold, a property in which the
Partnership held a minority joint venture interest. During April and June 1997,
the Partnership sold its remaining two properties, the Woods Apartments and
Orchards Shopping Center, respectively. In addition, during April 1997, the
Brookhollow/Stemmons Center Office Building was sold, a property in which the
Partnership held a minority joint venture interest. The Partnership has
retained a portion of the cash from the property sales to satisfy obligations
of the Partnership as well as establish a reserve for contingencies. The timing
of the termination of the Partnership and final distribution of cash will
depend upon the nature and extent of liabilities and contingencies which exist
or may arise. Such contingencies may include legal and other fees and costs
stemming from litigation involving the Partnership including, but not limited
to, the lawsuit discussed in Note 16 of Notes to Financial Statements. In the
absence of any contingency, the reserves will be paid within twelve months of
the last property being sold. In the event a contingency continues to exist or
arises, reserves may be held by the Partnership for a longer period of time.
3. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally
accepted accounting principles requires the General Partner 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 period. Actual results could vary from those estimates.
(b) The Partnership recorded wrap-around mortgage loans at the face amount of
the mortgage instrument which included the outstanding indebtedness of the
borrower under the terms of the underlying mortgage obligations. The underlying
mortgage obligations were recorded as a reduction of the wrap-around mortgage
loan and the resulting balance represented the Partnership's net advance to the
borrower. The Partnership was responsible for making periodic payments to the
<PAGE>
underlying mortgage lenders only to the extent that payments as required by the
wrap-around mortgage agreement were received by the Partnership from the
borrower.
(c) Income on loans was recorded as earned in accordance with the terms of the
related loan agreements. The accrual of interest was discontinued when a loan
became ninety days contractually delinquent or sooner when, in the opinion of
the General Partner, an impairment had occurred in the value of the collateral
property securing the loan. Income on nonaccrual loans or loans which were
otherwise not performing in accordance with their terms was recorded on a cash
basis.
Income from operations of real estate held for sale is reflected in the
accompanying Statements of Income and Expenses net of related direct operating
expenses.
(d) Loan losses on mortgage notes receivable were charged to income and an
allowance account was established when the General Partner believed the loan
balance would not be recovered. The General Partner assessed the collectibility
of each loan on a periodic basis through a review of the collateral property
operations, the property value and the borrower's ability to repay the loan.
Upon foreclosure, the loan, net of the allowance, was transferred to real
estate held for sale after the fair value of the property, less costs of
disposal was assessed. Upon the transfer to real estate held for sale, a new
basis in the property was established.
Effective January 1, 1995 the Partnership adopted Statement of Financial
Accounting Standards, No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of." Under SFAS 121, the
General Partner periodically assessed, but not less than on an annual basis,
the fair value of its real estate properties held for sale. The General Partner
estimated the fair value of its properties based on the current sales price
less estimated closing costs. Changes in the property's fair value were
recorded by an adjustment to the property allowance account and were recognized
in the income statement as an increase or decrease through recovery income or a
provision for loss in the period the change in fair value was determined. The
General Partner considered the methods referred to above to result in a
reasonable measurement of a property's fair value, unless other factors
affecting the property's value indicated otherwise.
(e) Investment in joint ventures with affiliates represented the Partnership's
percentage interests, under the equity method of accounting, in joint ventures
with affiliated partnerships. Under the equity method of accounting, the
Partnership recorded its initial investment at cost and adjusted its investment
account for additional capital contributions, distributions and its share of
income or loss.
(f) Deferred expenses consisted of leasing commissions which were amortized
over the life of each respective lease, and financing fees which were amortized
over the terms of the respective loan agreements. Upon sale, any remaining
unamortized balance of deferred financing fees was recognized as debt
extinguishment expense and classified as an extraordinary item.
<PAGE>
(g) Revenue was recognized on an accrual basis in accordance with generally
accepted accounting principles. Income from operating leases with significant
abatements and/or scheduled rent increases was recognized on a straight line
basis over the respective lease term. Service income included reimbursements
from operating costs such as real estate taxes, maintenance and insurance and
was recognized as revenue in the period the applicable costs were incurred.
(h) The Financial Accounting Standard Board's Statement No. 107, _Disclosures
About Fair Value of Financial Instruments_, requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
that value. Since quoted market prices are not available for the Partnership's
financial instruments, fair values have been based on estimates using present
value techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, may not be realized in
immediate settlement of the instrument. Statement No. 107 does not apply to all
balance sheet items and excludes certain financial instruments and all
non-financial instruments such as real estate and investment in joint ventures
from its disclosure requirements.
(i) The Partnership recorded repurchases of Interests by the Early Investment
Incentive Fund as a reduction of Limited Partners' Capital (see Note 4 of Notes
to Financial Statements). Cash and cash equivalents not utilized to repurchase
Interests, but which are part of the Early Investment Incentive Fund, are
classified as restricted assets of the Partnership.
(j) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash is held or
invested in one financial institution.
(k) The Partnership is not liable for Federal income taxes as each partner
recognizes his proportionate share of the Partnership income or loss in his tax
return; therefore, no provision for income taxes is made in the financial
statements of the Partnership.
(l) For financial statement purposes, prior to 1996 partners were allocated
income and loss in accordance with the profit and loss percentages in the
Partnership Agreement. In order for the capital accounts of the General Partner
and Limited Partners to appropriately reflect their remaining economic
interests as provided for in the Partnership Agreement, income allocations
between the partners have been adjusted for financial statement purposes in
1996 and 1997.
(m) 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. Since the Partnership has no dilutive securities there is no
difference between basic and diluted net income per Limited Partnership
Interest.
4. Partnership Agreement:
The Partnership was organized on January 22, 1982. The Partnership Agreement
<PAGE>
provides for Balcor Mortgage Advisors-II to be the General Partner and for the
admission of Limited Partners through the sale of Limited Partnership Interests
at $500 per Interest, 237,476 of which were sold on or prior to November 10,
1982, the termination date of the offering.
The Partnership Agreement provides that profits and losses are allocated 92.5%
to the Limited Partners, of which 2.5% relates to the Early Investment
Incentive Fund, and 7.5% to the General Partner. For financial statement
purposes, prior to 1996 partners were allocated income and loss in accordance
with the provisions in the Partnership Agreement. In order for the capital
accounts of the General Partner and Limited Partners to appropriately reflect
their remaining economic interests as provided for in the Partnership
Agreement, income allocations between the partners have been adjusted for
financial statement purposes in 1996 and 1997.
To the extent that Cash Flow is distributed, distributions are made as follows:
(i) 90% of such Cash Flow is distributed to the Limited Partners, (ii) 7.5% of
such Cash Flow is distributed to the General Partner, and (iii) 2.5% of such
Cash Flow is deposited into the Early Investment Incentive Fund for payment on
dissolution of the Partnership to investors who subscribed prior to
December 31, 1982 ("Early Investors") if necessary for them to receive an
amount equal to their Original Capital plus a specified cumulative return based
on the date of investment. Amounts, if any, remaining in the account after the
Early Investors have received their cumulative return will be distributed 90%
to all Limited Partners and 10% to the General Partner. The General Partner
will not receive any distributions from the Early Investment Incentive Fund in
accordance with the provisions of the Partnership Agreement.
Amounts placed in the Early Investment Incentive Fund were, at the sole
discretion of the General Partner and subject to certain limitations as set
forth in the Partnership Agreement, used to repurchase Interests from existing
Limited Partners. All repurchases of Interests have been made at 95% of the
then current valuation of such Limited Partnership Interests at the previous
quarter end less any distributions made after the previous quarter end.
Distributions of Cash Flow and Mortgage Reductions pertaining to any
repurchased Interests were paid to the Early Investment Incentive Fund. To the
extent that amounts in the Early Investment Incentive Fund have not been
utilized to repurchase Interests, such amounts are invested in short-term
interest-bearing instruments with earnings thereon credited to this account. In
February 1997, the Partnership discontinued the repurchase of Interests from
Limited Partners. As of December 31, 1997, there were 21,249 Interests and cash
of $4,520,005 in the Early Investment Incentive Fund.
5. Investment in Loans Receivable:
In June 1996, the Pepper Square Apartments wrap-around mortgage loan matured
and the borrower repaid the loan in full. In August 1996, the borrower of the
Corporate Campus I Office Building wrap-around mortgage loan repaid the loan at
a discount. See Note 11 of Notes to Financial Statements for additional
information regarding the discounted repayment.
In August, October and December 1996, the Partnership sold its interest in the
Seafirst Financial Center, Bannockburn Executive Plaza and Carmel on Providence
Apartments wrap-around mortgage loans, respectively. See Note 12 of Notes to
Financial Statements for additional information.
<PAGE>
Under certain circumstances, the General Partner entered into negotiations with
borrowers which resulted in a reduction of interest rates, periodic payments or
the modification of other loan terms. Nonaccrual loans and loans which were
restructured were thereinafter referred to as impaired loans.
Net interest income relating to impaired loans would have been approximately
$1,478,000 in 1996 and $2,025,000 in 1995. The average recorded investments in
impaired loans during the year ended December 31, 1996 was approximately
$24,865,000. Net interest income from impaired loans included in the
accompanying Statements of Income and Expenses amounted to approximately
$2,288,000 ($2,497,000 cash basis) in 1996 and $2,001,000 ($2,002,000 cash
basis) in 1995.
6. Allowances for Losses on Loans:
Activity recorded in the allowances for losses on loans during the three years
ended December 31, 1997 is described in the table below:
1997 1996 1995
------------ ------------- ------------
Loans:
Balance at beginning of
year None $3,943,630 $ 5,013,959
Provision charged to
income None None 756,370
Recovery of provision
previously charged
to income None (3,475,817) (756,370)
Direct write-off
of loans against
allowance None (467,813) (1,070,329)
------------- ------------ ------------
Balance at the end of
the year None None $ 3,943,630
============= ============= ============
7. Mortgage Note Payable:
As of December 31, 1996, the Partnership had a mortgage note payable
outstanding of $1,622,593 related to the Orchards Shopping Center. This
mortgage note was repaid in connection with the sale of this property during
1997 as further described in Notes 13 of Notes to Financial Statements.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
incurred and paid interest expense on mortgage notes payable of $69,212,
$152,310, and $463,817, respectively.
8. Management Agreements:
The Partnership's properties were under management agreements with a third
party management company prior to the sales of the properties. These management
agreements provided for annual fees of 5% of gross operating receipts for the
residential property and 3% to 6% of gross operating receipts for the
commercial property.
<PAGE>
9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended
12/31/97 12/31/96 12/31/95
-------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ ------- ------ ------- ------ -------
Mortgage servicing fees $ 192 None $ 22,757 $ 192 $ 52,651 $ 2,392
Property management fees None None None None 238,090 None
Reimbursement of expenses
to the General Partner
at cost:
Accounting 24,614 $ 7,649 18,510 13,452 61,773 8,041
Data processing 7,122 2,911 3,629 1,181 23,072 2,369
Investor communica-
tions None None None None 10,247 None
Legal 15,632 4,824 11,415 8,059 20,531 2,751
Portfolio management 73,098 22,721 53,992 39,402 116,877 20,400
Other 12,040 3,600 15,497 11,878 12,555 58
The Partnership participated in an insurance deductible program with other
affiliated partnerships in which the program paid claims up to the amount of
the deductible under the master insurance policies for its properties. The
program was administered by an affiliate of the General Partner (The Balcor
Company) who received no fee for administering the program; however, the
General Partner was reimbursed for program expenses. The Partnership paid
premiums to the deductible insurance program of $4,586 and $32,357 for 1996 and
1995, respectively.
The General Partner made a contribution of $79,159 in connection with the
settlement of certain litigation as further discussed in Note 15 of Notes to
Financial Statements.
10. Investments in Joint Ventures with Affiliates:
In 1990 and 1991, two joint ventures, consisting of the Partnership and certain
affiliates, acquired title to the Brookhollow/Stemmons and Perimeter 400 Center
office buildings, respectively. The Partnership's sharing percentages for the
Brookhollow/Stemmons and Perimeter 400 Center office buildings were 27.5% and
12.68%, respectively.
During April 1997, the joint venture which owned the Brookhollow/Stemmons
Center Office Building sold the property in an all cash sale for $12,724,000.
From the proceeds of the sale, the joint venture paid $340,293 in selling
costs. In connection with the sale, the joint venture wrote off $903,384 of
accounts receivable related to rental abatements and scheduled rent increases,
which has been recorded as a reduction of the gain. The basis of the property
was $11,074,128. For financial statement purposes, the joint venture recognized
a gain of $406,195, all of which was allocated to the Partnership. Pursuant to
the sale agreement, $250,000 of the sale proceeds were placed in escrow and
<PAGE>
were not to be disbursed to the joint venture until the earlier of the
settlement of any claims presented by the purchaser or October 1997. The funds
were released in full in October 1997 and the Partnership's share was $68,750.
For financial statement purposes, in previous years the joint venture partners
were allocated income and loss in accordance with the profit and loss
percentages in the joint venture agreement. In order for the capital accounts
of joint venture partners to appropriately reflect their remaining economic
interests, the Partnership received an adjusted income allocation in 1997.
In December 1996, the joint venture which owned the Perimeter 400 Center Office
Building sold the property in an all cash sale for $40,700,000. From the
proceeds of the sale, the joint venture paid $882,765 in selling costs. The
joint venture recognized a gain of $12,420,983 from the sale of the property,
of which $1,641,502 is the Partnership's share. Pursuant to the terms of the
sale, the joint venture was required to retain $1,750,000 of the sale proceeds
until September 1997, at which time the funds were released in full. The
Partnership's share of the proceeds was $221,900. Profits and losses, all
capital contributions and distributions were allocated in accordance with the
participants' original funding percentages.
During 1995, the Partnership recognized $331,822 as its share of the recoveries
of provisions related to the change in the estimates of the fair value of the
properties. These amounts are included in the Partnership's participation in
income of joint ventures with affiliates.
In addition, during 1997, 1996, and 1995, the Partnership received
distributions from these joint ventures totaling $3,759,861, $5,262,527, and
$399,111, respectively and made a contribution of $67,591 in 1997.
11. Discounted Prepayments of Loans Receivable:
(a) In August 1996, the borrower of the $5,800,000 Corporate Campus I Office
Building wrap-around loan repaid the loan. The Partnership received proceeds of
$2,800,000 and the borrower repaid the $2,532,187 underlying mortgage loan. The
remaining wrap-around loan receivable balance of $467,813 was written off
against the previously established allowance for losses in connection with the
prepayment of the loan. For financial statement purposes, the Partnership
recognized a recovery of a provision of $95,187 related to the change in the
estimate of the fair value of the loan.
(b) In August 1995, the borrower of the $16,750,000 Colony Apartments
wrap-around loan repaid the loan. The Partnership received proceeds of
$8,301,516 and the borrower repaid the $7,378,155 underlying mortgage loan.
Allowances of $1,070,329 were written off in connection with the prepayment of
the loan.
12. Sales of Loans Receivable:
(a) In August 1996, the Partnership sold its interest in the Seafirst Financial
Center loan for $8,344,608. The purchaser acquired the loan receivable subject
to the existing underlying mortgage loan in the amount of $24,376,892. From the
proceeds of the sale, the Partnership paid $296,500 in selling costs. In
addition, the Partnership received $406,426 of previously deferred interest
<PAGE>
income. For financial statement purposes, the Partnership did not recognize a
gain or loss related to the sale of its interest in this loan and recognized a
recovery of provision of $2,692,630 related to the change in the estimate of
the value of the loan.
(b) In October 1996, the Partnership sold its interest in the Bannockburn
Executive Plaza loan for $5,504,780. The purchaser acquired the loan receivable
subject to the existing underlying mortgage loan in the amount of $3,252,936.
From the proceeds of the sale, the Partnership paid $161,500 in selling costs.
For financial statement purposes, the Partnership recognized a gain of $392,954
related to the sale of its interest in this loan.
(c) In December 1996, the Partnership sold its interest in the Carmel on
Providence loan for $3,098,102. The purchaser acquired the loan receivable
subject to the existing underlying mortgage loan in the amount of $1,157,435.
From the proceeds of the sale, the Partnership paid $129,808 in selling costs.
For financial statement purposes, the Partnership recognized a gain of $925,729
related to the sale of its interest in this loan and a recovery of provision of
$688,000 related to the change in the estimate of the value of the loan.
13. Sales of Real Estate:
(a) In April 1997, the Partnership sold the Woods Apartments in an all cash
sale for $10,000,000. From the proceeds of the sale, the Partnership paid
$230,158 in selling costs. The basis of the property was $7,523,705. For
financial statement purposes, the Partnership recognized a gain of $2,246,137
from the sale of this property.
(b) In June 1997, the Partnership sold the Orchards Shopping Center in an all
cash sale for $7,200,000. From the proceeds of the sale, the Partnership paid
$1,603,132 to the third party mortgage holder in full satisfaction of the first
mortgage loan, $252,039 in selling costs and $32,063 in prepayment penalties.
The basis of the property was $6,691,000. For financial statement purposes, the
Partnership recognized a gain of $256,961 from the sale of this property.
(c) In January 1995, the Partnership sold the Crossing Shopping Center for
$2,650,000. The purchaser took title subject to the existing first mortgage
loan in the amount of $1,793,760, which represents a noncash transaction to the
Partnership. Accordingly, the noncash aspect of this transaction is not
presented in the Partnership's Statements of Cash Flows. From the proceeds of
the sale, the Partnership paid $79,750 in selling costs. The basis of the
property was $1,852,350. For financial statement purposes, the Partnership
recognized a gain of $717,900 from the sale of this property.
(d) In August 1995, the Partnership sold the Candlewyck Apartments in an all
cash sale for $10,000,000. From the proceeds of the sale, the Partnership paid
$382,044 in selling costs. The basis of the property was $7,795,210. For
financial statement purposes the Partnership recognized a gain of $1,822,746
from the sale of this property.
14. Extraordinary Item:
In June 1997, the Partnership sold the Orchards Shopping Center. In connection
<PAGE>
with the sale, the Partnership paid $32,063 of prepayment penalties and wrote
off the remaining unamortized deferred expenses in the amount of $3,329. These
amounts were recognized as debt extinguishment expense and classified as an
extraordinary item.
15. Settlement of Litigation:
A settlement received final approval by the court in November 1996 in the class
action, Paul Williams and Beverly Kennedy et. al. v. Balcor Pension Investors,
et. al. upon the terms described in the notice to class members in September
1996. The General Partner made a contribution of $79,159 to the Partnership, of
which the plaintiffs' counsel received $7,916 pursuant to the settlement
agreement. In February 1997, the General Partner made a settlement payment of
the remaining amount of $71,243 ($.33 per Interest) to members of the class
pursuant to the settlement. Of the settlement amount, $30,670 was paid to
original investors who held their Limited Partnership Interests at the date of
the settlement and was recorded as a distribution to Limited Partners in the
Financial Statements. The remaining portion of the settlement of $40,573 was
paid to original investors who previously sold their Interests in the
Partnership. This amount was recorded as an administrative expense in the
Financial Statements. Similar contributions and payments were made on the seven
other partnerships included in the lawsuit in addition to those payments
described above. The Balcor Company paid an additional $635,000 to the
plaintiffs' class counsel and The Balcor Company received approximately
$946,000 from the eight partnerships as a reimbursement of its legal expenses,
of which $93,636 was the Partnership's share. The settlement had no material
financial impact on the Partnership.
16. Contingency:
The Partnership is currently involved in a lawsuit whereby the Partnership, the
General Partner and certain third parties have been named as defendants seeking
damages relating to tender offers to purchase interests in the Partnership and
nine affiliated partnerships initiated by the third party defendants in 1996.
The defendants continue to vigorously contest this action. The action has been
dismissed with prejudice and plaintiffs have filed an appeal. It is not
determinable at this time whether or not an unfavorable decision in this action
would have a material adverse impact on the financial position, operations or
liquidity of the Partnership. The Partnership believes it has meritorious
defenses to contest the claims.
17. Fair Value of Financial Instruments:
The carrying amounts and fair values of the Partnership's financial instruments
at December 31, 1997 and 1996 are as follows:
The carrying value of cash and cash equivalents, accounts and accrued interest
receivable and accounts and accrued interest payable approximates fair value.
Based on borrowing rates available to the Partnership at the end of 1996 and
for mortgage loans with similar terms and maturities, the fair value of the
mortgage note payable approximated the carrying value.
<PAGE>
18. Subsequent Event:
In January 1998, the Partnership made a distribution of $1,833,315 ($7.72 per
Interest) to the holders of Limited Partnership Interests consisting of
available Cash Flow reserves of $7.43 per Interest and Mortgage Reductions of
$.29 per Interest from the Partnership's share of the sale holdback on the
Brookhollow/Stemmons Center Office Building.
<PAGE>
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<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8078
<SECURITIES> 0
<RECEIVABLES> 54
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8132
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 8132
<CURRENT-LIABILITIES> 74
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 8058
<TOTAL-LIABILITY-AND-EQUITY> 8132
<SALES> 0
<TOTAL-REVENUES> 4256
<CGS> 0
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<OTHER-EXPENSES> 370
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 3886
<INCOME-TAX> 0
<INCOME-CONTINUING> 3886
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<EXTRAORDINARY> (357)
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<NET-INCOME> 3851
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</TABLE>
