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, 1998
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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. 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. The Registrant sold its final real estate investment in June 1997.
The Registrant has retained a portion of the cash from the property sales to
satisfy obligations of the Registrant as well as to 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". Due to this litigation, the Registrant will not be dissolved and
reserves will be held by the Registrant until the conclusion of all
contingencies. There can be no assurances as to the time frame for conclusion
of these contingencies.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" for information regarding the
Registrant's Year 2000 readiness.
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.
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, 1998, the Registrant did not own any properties.
In the opinion of the General Partner, the Registrant has obtained adequate
insurance coverage for property liability and property damage matters.
<PAGE>
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.
On February 3, 1997, the plaintiffs filed a Notice of Appeal of the Chancery
Court's order to the Appellate Court of Illinois. Oral arguments before the
Appellate Court were held on March 18, 1998. On November 12, 1998, the
Appellate Court issued an opinion affirming the Chancery Court's dismissal of
the case. On December 3, 1998, the plaintiffs filed a notice of intent to
appeal the Appellate Court's ruling to the Illinois Supreme Court.
<PAGE>
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 how the
outcome of this action will impact the remaining cash reserves of 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 1998.
<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, 1998, the number of record holders of Limited Partnership
Interests of the Registrant was 9,509.
Item 6. Selected Financial Data
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Year ended December 31,
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1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Total income $332,470 $1,752,573 $9,867,879 $7,464,674 $7,904,391
Recovery of losses
on loans and
accrued interest
receivable None None 3,475,817 756,370 None
Provision for
losses on loans
and accrued inter-
est receivable None None None 756,370 600,000
Income before
gains on sales of
assets and extra-
ordinary item 114,358 1,383,045 9,170,726 6,001,706 6,379,013
Net income 114,358 3,850,751 10,489,409 8,542,352 6,498,855
Net income per
average number of
Limited Partner-
ship Interests
outstanding - Basic
and Diluted 0.53 17.81 35.60 34.90 26.35
Total assets 6,427,378 8,132,457 37,934,990 48,074,826 77,868,675
Mortgage notes
payable None None 1,622,593 1,666,291 7,153,074
Distributions per
Limited Partner-
ship Interest(A) 7.72 142.20(B) 87.34 132.12 34.35
(A) These amounts include distributions of Original Capital of $0.29, $114.20,
$58.84 and $109.12 per Limited Partnership Interest for the years 1998, 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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Balcor Pension Investors-III (the "Partnership") recognized net income during
1998 as interest income earned on short-term investments exceeded
administrative expenses. During 1997, 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. Further discussion of
the Partnership's operations is summarized below.
1998 Compared to 1997
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Income (loss) from operations of real estate held for sale represented the net
operations of the properties acquired by the Partnership through foreclosure.
The Partnership sold the Woods Apartments and the Orchards Shopping Center in
April and June 1997, respectively, and recognized gains on the sales totaling
$2,503,098. Both of these properties were generating income prior to their
sales. During 1998, the Partnership paid expenditures related to both the
Orchards Shopping Center and the Woods Apartments. As a result, the Partnership
generated a loss from operations of real estate held for sale during 1998 as
compared to income during 1997.
The Brookhollow/Stemmons Center Office Building was owned by a joint venture
with an affiliate. As a result of the sale of this property during 1997,
participation in income of joint venture with affiliate ceased during 1997.
Higher average cash balances were available for investment during 1997
primarily as a result of the timing of the distribution to Limited Partners of
the proceeds received in connection with the 1996 sale of the Carmel on
Providence loan and the 1997 sales of the Woods Apartments, Orchards Shopping
Center and Brookhollow/Stemmons Center Office Building. As a result, interest
income on short-term investments decreased during 1998 as compared to 1997.
The Partnership recognized other income during 1998 in connection with its
share of a refund of real estate taxes which had previously been under appeal.
<PAGE>
The refund related to the Perimeter 400 Office Building, which was sold in
1996. The Partnership held a joint venture interest in this property. The
Partnership also recognized other income during 1997 in connection with a
partial refund of prior years' insurance premiums relating to the Partnership's
properties and a real estate tax refund related to the Crossings Shopping
Center.
During February 1997, the General Partner made a payment 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. In addition, during 1998 the Partnership incurred lower accounting,
data processing and portfolio management fees and lower bank charges. As a
result, administrative expense decreased during 1998 as compared to 1997.
In connection with the June 1997 sale of the Orchards Shopping Center, the
Partnership wrote-off the remaining unamortized deferred expenses of $3,329 and
paid prepayment penalties of $32,063. These amounts were recognized as debt
extinguishment expenses and classified as an extraordinary item for financial
statement purposes.
1997 Compared to 1996
- ---------------------
During 1996, the Partnership received repayments on two loans receivable and
sold three loans receivable. As a result, interest income on loans receivable
ceased during 1996.
As a result of the sales of the Woods Apartments and the Orchards Shopping
Center in 1997, which were generating income prior to their sales, income from
operations of real estate held for sale decreased during 1997 as compared to
1996.
Participation in income of joint ventures with affiliates represented the
Partnership's 27.5% and 12.68% share of income from the Brookhollow/Stemmons
Center and Perimeter 400 Center 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 Office Building, 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 to Limited Partners 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.
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.
<PAGE>
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, an allowance of $467,813 related to the Corporate Campus I Office
Building loan was 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.
Liquidity and Capital Resources
- -------------------------------
The cash position of the Partnership decreased by approximately $2,143,000 as
of December 31, 1998 when compared to December 31, 1997 primarily due to the
payment of distributions to Partners in January 1998. The Partnership generated
cash of approximately $139,000 from its operating activities primarily from
interest income received on short-term investments, which was partially offset
by the payment of administrative expenses and expenditures related to the
properties sold in 1997. The Partnership's financing activities consisted of
the payment of distributions to the Partners of approximately $1,816,000 and an
increase in restricted cash and cash equivalents of approximately $465,000 due
to distributions to the Early Investment Incentive Fund and interest income
earned on the Fund.
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. The Partnership sold its final real estate investment in June
1997. The Partnership has retained a portion of the cash from the property
sales to satisfy obligations of the Partnership as well as to 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". Due to this litigation, the Partnership will not be
dissolved and reserves will be held by the Partnership until the conclusion of
all contingencies. There can be no assurances as to the time frame for
conclusion of these contingencies.
<PAGE>
In February 1997, the Partnership discontinued the repurchase of Interests from
Limited Partners. As of December 31, 1998, there were 21,249 Interests and cash
of $4,985,126 in the Early Investment Incentive Fund.
The Partnership made distributions to Limited Partners totaling $7.72, $142.20,
and $87.34 per Interest in 1998, 1997 and 1996, respectively. See Statements of
Partners' Capital for additional information. Distributions were comprised of
$7.43 of Cash Flow and $0.29 of Mortgage Reductions in 1998, $28.00 of Cash
Flow and $114.20 of Mortgage Reductions in 1997 and $28.50 of Cash Flow and
$58.84 of Mortgage Reductions in 1996.
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. 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. Amounts allocated to the Early Investment Incentive Fund
will also be distributed at that time.
The Partnership sold all of its remaining real property investments and loans
receivable and distributed a majority of the proceeds from these sales to
Limited Partners in 1996 and 1997. Since the Partnership no longer has any
operating assets, the number of computer systems and programs necessary to
operate the Partnership has been significantly reduced. The Partnership relies
on third party vendors to perform most of its functions and has implemented a
plan to determine the Year 2000 compliance status of these key vendors. The
Partnership is within its timeline for having these plans completed prior to
the year 2000.
The Partnership's plan to determine the Year 2000 compliance status of its key
vendors involves the solicitation of information from these vendors through the
use of surveys, follow-up discussions and review of data where needed. The
Partnership has sent out surveys to these vendors and received back a majority
of these surveys. While the Partnership cannot guarantee Year 2000 compliance
by its key vendors, and in many cases will be relying on statements from these
vendors without independent verification, preliminary surveys indicate that the
key vendors performing services for the Partnership are aware of the issues and
are working on a solution to achieve compliance before the year 2000. The
Partnership is in the process of developing a contingency plan in the event any
of its key vendors are not Year 2000 compliant prior to the year 2000. As part
of its contingency plan, the Partnership will identify replacement vendors in
the event that current vendors are not substantially Year 2000 compliant by
June 30, 1999. The Partnership does not believe that failure by any of its key
vendors to be Year 2000 compliant by the year 2000 would have a material effect
on the business, financial position or results of operations of the
Partnership.
Certain statements in this report constitute "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements may include statements regarding income or losses as well as
assumptions relating to the foregoing.
<PAGE>
The forward-looking statements made by the Partnership are subject to known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Partnership to differ from any
future results, performance or achievements expressed or implied by the
forward-looking statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
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The supplemental financial information specified by Item 305 of Regulation S-K
is not applicable.
Item 8. Financial Statements and Financial Statement Schedules and
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Supplementary Data
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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 Managing Director, Chief Jayne A. Kosik
Financial Officer, Treasurer
and Assistant Secretary
Thomas E. Meador (age 51) 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 a 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.
Mr. Meador is on the Board of Directors of Grubb & Ellis Company, a publicly
traded commercial real estate firm. Mr. Meador was elected to the Board of
Grubb & Ellis Company in May 1998. Mr. Meador is also a director of AMLI
Commercial Properties Trust, a private real estate investment trust that owns
office and industrial buildings in the Chicago, Illinois area. Mr. Meador was
elected to the Board of AMLI Commercial Properties Trust in August 1998.
Alexander J. Darragh (age 44) 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.
Jayne A. Kosik (age 41) joined Balcor in August 1982 and, as Chief Financial
Officer, is responsible for Balcor's financial, human resources and treasury
functions. Ms. Kosik is also a member of the board of directors of The Balcor
Company. 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.
(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 1998.
<PAGE>
Item 11. Executive Compensation
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The Registrant has not paid and does not propose to pay any remuneration to the
executive officers and directors of the General Partner. The executive 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.
In addition, Balcor LP Corp., an affiliate of the General Partner, holds title
to 12 Limited Partnership Interests in the Partnership due exclusively to
instances in which Limited Partners abandoned title to their Limited
Partnership Interests. Balcor LP Corp. is a nominee holder only of such
Interests and has disclaimed any economic or beneficial ownership in said
Interests. All distributions of cash payable with respect to such Interests
held by Balcor LP Corp. are returned to the Partnership for distribution to
other Limited Partners in accordance with the Partnership Agreement.
(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.
<PAGE>
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) Material Contract:
(a)(i) 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 April 11, 1997 is incorporated
herein by reference.
(ii) 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.
(b) 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 1998 is attached hereto.
(b) Reports on Form 8-K: No Reports were filed on Form 8-K during the quarter
ended December 31, 1998.
(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
and Financial Officer) of Balcor
Mortgage Advisors-II, the General Partner
Date: March 19, 1999
--------------
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
Advisors-II, the General Partner
/s/Thomas E. Meador March 19, 1999
-------------------- --------------
Thomas E. Meador
Senior Managing Director and Chief
Financial Officer (Principal
Accounting and Financial Officer) of
Balcor Mortgage Advisors-II, the
/s/Jayne A. Kosik General Partner March 19, 1999
- -------------------- --------------
Jayne A. Kosik
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1998 and 1997
Statements of Partners' Capital, for the years ended December 31, 1998, 1997
and 1996
Statements of Income and Expenses, for the years ended December 31, 1998, 1997
and 1996
Statements of Cash Flows, for the years ended December 31, 1998, 1997 and 1996
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:
In our opinion, the accompanying balance sheets and the related statements of
partners' capital, of income and expenses and of cash flows present fairly,
in all material respects, the financial position of Balcor Pension Investors-III
An Illinois Limited Partnership (the "Partnership") at December 31, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
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, 1998, the Partnership no longer has
an ownership interest in any real estate investment. Upon resolution of the
litigation described in Note 16 to the financial statements, the Partnership
intends to cease operations and dissolve.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 17, 1999
<PAGE>
BALCOR PENSION INVESTORS-III
(An Illinois Limited Partnership)
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
------------- -------------
Cash and cash equivalents $ 1,415,627 $ 3,558,254
Cash and cash equivalents - Early
Investment Incentive Fund 4,985,126 4,520,005
Accounts and accrued interest receivable 26,625 54,198
------------- -------------
$ 6,427,378 $ 8,132,457
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 27,199 $ 33,055
Due to affiliates 44,432 41,705
------------- -------------
Total liabilities 71,631 74,760
------------- -------------
Commitments and contingencies
Limited Partners' capital (237,476
Interests issued) 13,131,354 14,686,267
Less Interests held by Early Investment
Incentive Fund (21,249 at December 31, 1998
and 1997) (7,024,362) (7,024,362)
------------- -------------
6,106,992 7,661,905
General Partner's capital 248,755 395,792
------------- -------------
Total partners' capital 6,355,747 8,057,697
------------- -------------
$ 6,427,378 $ 8,132,457
============= =============
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, 1998, 1997 and 1996
Partners' Capital (Deficit) Accounts
-------------- --------------- --------------
General Limited
Total Partner Partners
-------------- --------------- --------------
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
Cash distributions to:
Limited Partners (A) (1,669,271) (1,669,271)
General Partner (147,037) (147,037)
Net income for the year
ended December 31, 1998 114,358 114,358
-------------- --------------- --------------
Balance at December 31,
1998 $ 6,355,747 $ 248,755 $ 6,106,992
============== =============== ==============
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, 1998, 1997 and 1996
(Continued)
(A) Summary of cash distributions paid per Limited Partnership Interest:
1998 1997 1996
-------------- --------------- --------------
First Quarter $ 7.72 $ 44.00 (B) $ 26.96
Second Quarter None 20.20 4.00
Third Quarter None 78.00 10.38
Fourth Quarter None None 46.00
(B) In addition to the above distribution, a special distribution of
$0.33 per Interest was made to class members including certain current
investors 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, 1998, 1997 and 1996
1998 1997 1996
-------------- --------------- --------------
Income:
Interest on loans
receivable $ 4,553,996
Less interest on loans
payable - underlying
mortgages 2,157,804
--------------
Net interest income on
loans receivable 2,396,192
(Loss) income from
operations of real
estate held for sale $ (8,979) $ 605,761 1,462,922
Participation in income
of joint ventures
with affiliates 441,062 2,029,975
Interest on short-term
investments 334,253 674,748 502,973
Other income 7,196 31,002
Recovery of losses on
loans and accrued
interest receivable 3,475,817
-------------- --------------- --------------
Total income 332,470 1,752,573 9,867,879
-------------- --------------- --------------
Expenses:
Administrative 218,112 369,528 697,153
-------------- --------------- --------------
Total expenses 218,112 369,528 697,153
-------------- --------------- --------------
Income before gains on
sales of loans
receivable and real
estate and extraordinary
item 114,358 1,383,045 9,170,726
Gains on sales of loans
receivable 1,318,683
Gains on sales of real
estate 2,503,098
-------------- --------------- --------------
Income before
extraordinary item 114,358 3,886,143 10,489,409
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, 1998, 1997 and 1996
(Continued)
1998 1997 1996
-------------- --------------- --------------
Extraordinary item:
Debt extinguishment
expenses (35,392)
-------------- --------------- --------------
Net income $ 114,358 $ 3,850,751 $ 10,489,409
============== =============== ==============
Income before
extraordinary item
allocated to General
Partner None None $ 2,654,999
============== =============== ==============
Income before
extraordinary item
allocated to Limited
Partners $ 114,358 $ 3,886,143 $ 7,834,410
============== =============== ==============
Income before
extraordinary item per
average number of
Limited Partnership
Interests outstanding
(216,227 in 1998 and
1997 and 220,064
in 1996)- Basic and
Diluted $ 0.53 $ 17.97 $ 35.60
============== =============== ==============
Extraordinary item
allocated to General
Partner None None None
============== =============== ==============
Extraordinary item
allocated to
Limited Partners None $ (35,392) 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, 1998, 1997 and 1996
(Continued)
1998 1997 1996
-------------- --------------- --------------
Extraordinary item per
average number of
Limited Partnership
Interests outstanding
(216,227 in 1998 and
1997 and 220,064
in 1996)- Basic and
Diluted None $ (0.16) None
============== =============== ==============
Net income allocated to
General Partner None None $ 2,654,999
============== =============== ==============
Net income allocated to
Limited Partners $ 114,358 $ 3,850,751 $ 7,834,410
============== =============== ==============
Net income per average
number of Limited
Partnership Interests
outstanding
(216,227 in 1998 and
1997 and 220,064
in 1996)- Basic and
Diluted $ 0.53 $ 17.81 $ 35.60
============== =============== ==============
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, 1998, 1997 and 1996
1998 1997 1996
-------------- --------------- --------------
Operating activities:
Net income $ 114,358 $ 3,850,751 $ 10,489,409
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)
Debt extinguishment
expense 3,329
Participation in
income of joint
ventures
with affiliates (441,062) (2,029,975)
Recovery of losses
on loans and
accrued interest
receivable (3,475,817)
Amortization of
deferred expenses 6,044 12,497
Net change in:
Escrow deposits 126,507 497
Accounts and
accrued interest
receivable 27,573 44,665 123,554
Prepaid expenses 33,582 (1,685)
Accounts payable (5,856) (277,143) 208,743
Due to affiliates 2,727 (32,459) 38,153
Other liabilities (384,433) (149,680)
Security deposits (83,571) (6,277)
-------------- --------------- --------------
Net cash provided by
operating activities 138,802 343,112 3,890,736
-------------- --------------- --------------
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, 1998, 1997 and 1996
(Continued)
1998 1997 1996
-------------- --------------- --------------
Investing activities:
Distributions from joint
venture partners -
affiliates $ 3,759,861 $ 5,262,527
Capital contribution to
joint venture
partners - affiliate (67,591)
Collection of principal
payments on loans
receivable 4,362,969
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
Costs incurred in
connection with
sales of real estate (482,197)
--------------- --------------
Net cash provided by
investing activities 20,410,073 25,985,178
--------------- --------------
Financing activities:
Distributions to Limited
Partners $ (1,669,271) (30,778,132) (19,128,967)
Distributions to General
Partner (147,037) (554,112) (564,006)
Contribution by General
Partner 79,159
Increase in cash
and cash equivalents -
Early Investment
Incentive Fund (465,121) (3,363,711) (853,857)
Repurchase of Limited
Partnership Interests (983,513)
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, 1998, 1997 and 1996
(Continued)
1998 1997 1996
-------------- --------------- --------------
Principal payments on
underlying loans
payable (602,363)
Repayment of mortgage
note payable (1,603,132)
Principal payments on
mortgage note payable (19,461) (43,698)
-------------- --------------- --------------
Net cash used in
financing activities (2,281,429) (36,239,389) (22,176,404)
-------------- --------------- --------------
Net change in cash and
cash equivalents (2,142,627) (15,486,204) 7,699,510
Cash and cash equivalents
at beginning of year 3,558,254 19,044,458 11,344,948
-------------- --------------- --------------
Cash and cash equivalents
at end of year $ 1,415,627 $ 3,558,254 $ 19,044,458
============== =============== ==============
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. The Partnership sold its final real estate investment in June
1997. The Partnership has retained a portion of the cash from the property
sales to satisfy obligations of the Partnership as well as to 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. Due to this litigation, the Partnership will not
be dissolved and reserves will be held by the Partnership until the conclusion
of all contingencies. There can be no assurances as to the time frame for
conclusion of these contingencies.
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
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.
<PAGE>
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) Losses on loans 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's operations, the
property's 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.
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.
(g) Revenue is 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 Partnership calculates the fair value of its financial instruments
based on estimates using present value techniques. The Partnership includes
this additional information in the notes to the financial statements when the
fair value is different than the carrying value of those financial instruments.
When the fair value reasonably approximates the carrying value, no additional
disclosure is made.
<PAGE>
(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, the partners were
allocated income and losses in accordance with the provisions in the
Partnership Agreement. In order for the capital account balances to more
accurately reflect the partners' remaining economic interests in the
Partnership, the income allocations have been adjusted.
(m) Statement of Financial Accounting Standards, No. 128, "Earnings per Share",
was adopted by the Partnership effective for the year ended December 31, 1997,
and has been applied to the prior earnings period 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.
(n) Certain reclassifications of prior years information were made to conform
to the 1998 presentation.
4. Partnership Agreement:
The Partnership was organized on January 22, 1982. The Partnership Agreement
provided 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, the partners were allocated income and losses in
accordance with the provisions in the Partnership Agreement. In order for the
capital account balances to more accurately reflect the partners' remaining
economic interests in the Partnership, the income allocations have been
adjusted.
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
<PAGE>
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. Since the required
subordination levels will not be met, the General Partner will not receive any
distributions from the Early Investment Incentive Fund. All Limited Partners
are Early Investors.
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. 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, 1998, there were 21,249 Interests and cash
of $4,985,126 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.
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. 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.
6. Allowances for Losses on Loans:
Activity recorded in the allowances for losses on loans during the three years
ended December 31, 1998 is described in the table below:
<PAGE>
1998 1997 1996
------------ ------------- ------------
Loans:
Balance at beginning of
year None None $3,943,630
Provision charged to
income None None None
Recovery of provision
previously charged
to income None None (3,475,817)
Direct write-off
of loans against
allowance None None (467,813)
------------- ------------ ------------
Balance at the end of
the year None None None
============= ============= ============
7. Mortgage Note Payable:
During the years ended December 31, 1997 and 1996, the Partnership incurred and
paid interest expense on mortgage notes payable of $69,212 and $152,310,
respectively.
8. Management Agreements:
The Partnership's properties were managed by 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.
9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended
12/31/98 12/31/97 12/31/96
-------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ ------- ------ ------- ------ -------
Mortgage servicing fees None None $ 192 None $ 22,757 $ 192
Reimbursement of expenses
to the General Partner
at cost:
Accounting $8,197 $7,337 24,614 $7,649 18,510 13,452
Data processing 2,536 722 3,449 1,664 2,019 None
Legal 5,056 4,576 15,632 4,824 11,415 8,059
Portfolio management 34,582 31,797 76,771 23,968 55,602 40,583
Other 3,600 None 12,040 3,600 15,497 11,878
Prior to May 1995, the Partnership participated in an insurance deductible
program with other affiliated partnerships in which the program paid claims up
<PAGE>
to the amount of the deductible under the master insurance policy 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 expenses. The Partnership paid
premiums to the deductible insurance program relating to claims for periods
prior to May 1, 1995 of $4,586 for 1996.
The General Partner made a contribution to the Partnership in 1997 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 Center and Perimeter 400
Center office buildings, respectively. The Partnership's sharing percentages
for the Brookhollow/Stemmons Center 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
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 received its share in
the amount of $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.
In addition, during 1997 and 1996, the Partnership received distributions from
these joint ventures totaling $3,759,861 and $5,262,527, respectively, and made
a contribution of $67,591 in 1997.
<PAGE>
11. Discounted Prepayment of Loan Receivable:
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.
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
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 a 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 a 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.
<PAGE>
14. Extraordinary Item:
In June 1997, the Partnership sold the Orchards Shopping Center. In connection
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, Dee vs. Walton Street
Capital Acquisition II, LLC, 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, which dismissal was affirmed by the Illinois Appellate Court.
Plaintiffs have filed a further appeal to the Illinois Supreme Court. It is not
determinable at this time how the outcome of this action will impact the
remaining cash reserves of the Partnership. The Partnership believes that it
has meritorious defenses to contest the claims.
<PAGE>
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