UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: MARCH 31, 1995
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 .
Commission File Number: 0-14459
REALTY SOUTHWEST FUND III, LTD.
(Exact name of registrant as specified in its charter)
Texas 76-0113542
(State of organization) (I.R.S.Employer
Identification No.)
265 Franklin Street, Boston, Massachusetts 02110
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
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. XIndicate 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
--
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Prospectus of registrant dated Part IV
December 28, 1984, as supplemented
REALTY SOUTHWEST FUND III, LTD.
1995 FORM 10-K
TABLE OF CONTENTS
PART I Page
Item 1 Business I-1
Item 2 Properties I-3
Item 3 Legal Proceedings I-4
Item 4 Submission of Matters to a Vote of Security Holders I-4
PART II
Item 5 Market for the Partnership's Limited Partnership Interests
and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-6
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure II-6
PART III
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-2
Item 12 Security Ownership of Certain Beneficial Owners
and Management III-2
Item 13 Certain Relationships and Related Transactions III-3
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K IV-1
SIGNATURES IV-2
INDEX TO EXHIBITS IV-3
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA F-1 to F-43
PART I
ITEM 1. BUSINESS
Realty Southwest Fund III, Ltd. (the "Partnership") is a limited partnership
formed on August 13, 1984 under the Uniform Limited Partnership Act of the State
of Texas for the purpose of investing in a diversified portfolio of newly-
constructed and to-be-constructed income-producing operating properties. The
Partnership was structured to invest exclusively in multi-family residential
properties located primarily in the states of Texas, California, Florida and
Georgia and to employ substantial leverage in making such acquisitions. The
Partnership sold $40,000,000 in Limited Partnership Units (40,000 units at
$1,000 per Unit) from December 28, 1984 to July 22, 1985 pursuant to a
Registration Statement on Form S-11 filed under the Securities Act of 1933
(Registration No. 2-93593). Limited Partners will not be required to make any
additional capital contributions.
As of March 31, 1995, the Partnership owned, through joint venture
partnerships, interests in the operating properties set forth in the following
table:
Name of Joint Venture Date of
Name and Type of Property Acquisition Type of
Location Size of Interest Ownership (1)
Fieldstone at Brandermill L.P. 265 4/24/85 (2) Fee ownership of land
Fieldstone at Brandermill units and improvements
Apartments (through joint venture)
Germantown, MD
Grapevine I Partners, Ltd. 200 10/3/85 Fee ownership of land
Grayson Square Apartments units and improvements
Grapevine, TX (through joint venture)
Summerview Associates, Ltd. 240 10/8/85 Fee ownership of land
Summerview Apartments units and improvements
Atlanta, GA (through joint venture)
(1)See Notes to the Financial Statements of the Registrant filed with this
Annual Report for a description of the mortgage indebtedness secured by the
Partnership's operating property investments and a description of the
agreements through which the Partnership has acquired these real estate
investments.
(2)In April 1995, the Partnership sold its interest in Fieldstone at
Brandermill L.P. to its co-venture partner for $50,000 as part of its
planned liquidation. See the discussion below and in Item 7 for additional
information.
The Partnership's original investment objectives were:
(i)to preserve and protect the original capital invested in the Partnership;
(ii) to achieve long-term capital appreciation through potential appreciation
in the values of Partnership properties;
(iii)to obtain tax losses during the early years of operations from deductions
generated by investments;
(iv) to provide annual distributions of cash flow from operations of the
Partnership;
(v)to achieve accumulation of equity through reduction of mortgage loans on
Partnership properties. The Partnership originally owned interests in
twelve apartment complexes.
As discussed further in Item 7, during fiscal 1994 the ownership of the
Seascape, Pacific Glen and Oakridge apartment complexes was transferred from the
respective joint ventures to the lender due to the inability of the respective
ventures to meet the debt service requirements of their mortgage loans. A four-
year period of negotiations with the lender on these three properties failed to
produce economically viable modification or restructuring agreements which could
have allowed the ventures some chance to recover a portion of their original
investments. Also during fiscal 1994, the Partnership's interest in the
Fountainhead Apartments, located in San Antonio, Texas, was assigned to a co-
venture partner (see Item 7). In prior years, the Partnership had sold or
otherwise disposed of its interests in the Hayden's Crossing, Hollows II, Fifth
Season, Windsor Park and Forestwood apartment complexes. Effective March 5,
1993, the mortgage lender on the Forestwood Apartments in Fort Myers, Florida
acquired the property by a transfer of the deed in lieu of foreclosure due to
the failure of the venture to make scheduled debt service payments. On January
14, 1993, the mortgage lender on the Windsor Park Apartments, in Hendersonville,
Tennessee, foreclosed on the property due to nonpayment of scheduled debt
service obligations. On October 20, 1992, the Partnership sold its interest in
the Fifth Season II Associates for $300,000; a total substantially less than the
amount of the Partnership's initial investment. On May 31, 1991, the joint
venture which owned the Hollows II Apartments, in San Antonio, Texas, sold the
property to a third party. Substantially all of the net proceeds from the sale
were used to settle the venture's outstanding debt obligation, which had been in
default, and to pay transaction closing costs. As a result, none of the venture
partners received any significant proceeds from the sale transaction. In
addition, on January 3, 1989 the holder of the first mortgage lien on the
Hayden's Crossing Apartments foreclosed on the property, which is located in
Grand Prairie, Texas, because of nonpayment of scheduled debt service
obligations. The Partnership's operating investment properties have been
adversely
impacted by an unprecedented and unforeseen growth in the supply of competing
apartment properties in the local markets in which the properties are located
subsequent to the time of their initial acquisition. The effects of the
resulting competition, combined with high debt service costs and weakened local
economies, prevented revenues at all of the properties from attaining the levels
required to fully pay operating expenses and original debt service obligations
without contributions from the venture partners. As discussed above, through
March 31, 1995 this situation had resulted in the loss of the ownership
interests in six of the apartment complexes through foreclosure proceedings and
the sale or assignment of the Partnership's interests in three other properties
for amounts which yielded no significant proceeds to the Partnership.
Subsequent to year-end, in April 1995, the Partnership also sold its interest in
the Fieldstone at Brandermill joint venture for $50,000 to the co-venture
partner. These ten properties represented approximately 84% of the
Partnership's original investment portfolio. While the remaining two
investments (Grayson Square and Summerview) were operating in compliance with
their mortgage debt agreements as of March 31, 1995, management does not believe
that there is any current or future value to the Partnership's interests in
these properties above the amounts of the outstanding debt obligations.
Regardless of whether the Partnership recovers any portion of its original
investments in the remaining properties, the Partnership will be unable to
achieve most of its original objectives since the sale and foreclosure
transactions involving the ten properties referred to above have failed to
return any proceeds to the Limited Partners. Furthermore, cash flow from the
Partnership's investment properties has not been sufficient to provide any
operating cash flow distributions to the Limited Partners to date.
The Partnership has generated tax losses from operations since inception.
However, the benefits of such losses to investors have been significantly
reduced by changes in the federal income tax laws subsequent to the organization
of the Partnership. The disposition of the Partnership's interest in the
Oakridge property in calendar 1994 and the planned dispositions of the
Fieldstone, Summerview and Grayson Square properties in calendar 1995 will
generate taxable gains to investors. These gains represent passive income which
can be offset by current year passive losses as well as any remaining suspended
passive loss carryforwards from prior years. If original investors of the
Partnership have not used the Partnership's passive losses to offset passive
income from other sources, the prior years' suspended losses should offset most
or all of the gains resulting from these dispositions.
All of the Partnership's investment properties are located in real estate
markets in which they face significant competition for the revenues they
generate. These investments are concentrated in high-demand markets which were
expected to show the greatest population growth at the time of the initial
investment of the Partnership's offering proceeds. However, these markets have
been adversely affected by the aforementioned oversupply of apartment complexes
with which the Partnership's properties compete generally on the basis of price
and amenities. Apartment properties in all markets also compete with the local
single-family home market for prospective tenants. Despite this competition,
the lack of significant new construction of multi-family housing over the past 2
- - to - 3 years has allowed the oversupply which existed in most markets to be
absorbed, with the result being a gradual improvement in occupancy levels and
effective rental rates and a corresponding increase in property values.
Management of the Partnership expects to continue to see improvement in this
sector of the real estate market in the near-term. Nonetheless, it appears
unlikely at the present time that conditions will improve as rapidly or to the
extent necessary for the Partnership to recover any meaningful portion of its
original investments in the remaining properties.
Given the circumstances described above which affect the Partnership's
remaining investments, and in light of the Partnership's limited cash reserves,
management believes that the prospects for any meaningful recoveries of invested
capital are remote and that a liquidation of the Partnership would be in the
best interests of the Limited Partners. The Managing General Partner
communicated its plans for completing the Partnership's liquidation in a special
letter to the Limited Partners dated October 21, 1994. As part of the
Partnership's liquidation, it is expected that the remaining investment
interests will be sold or assigned, most likely only for nominal amounts. As
stated above, in April 1995 the Partnership assigned its interest in the
Fieldstone joint venture to the co-venture partner for $50,000 in cash. The
Partnership may realize similar amounts from the ultimate dispositions of the
two remaining investments. Since the costs of liquidation are expected to
exceed any sales proceeds received by the Partnership and the current balance of
the Partnership's cash reserves, no distribution will be made to the Limited
Partners. The formal liquidation of the Partnership is expected to be completed
by the end of calendar year 1995.
The Partnership has no real property investments located outside the United
States. The Partnership is engaged solely in the business of real estate
investment; therefore, a presentation of information about industry segments is
not applicable.
The Partnership has no employees. The day-to-day operations of the
Partnership are the responsibility of the Managing General Partner.
The Managing General Partner of the Partnership is a Texas general
partnership composed of Realty Southwest Investment Group III Inc. and various
officers and employees of PaineWebber Properties Incorporated ("PWPI"). Realty
Southwest Investment Group III Inc., a Delaware corporation, is a wholly-owned
subsidiary of PaineWebber Properties Incorporated, which is a wholly-owned
subsidiary of PaineWebber Incorporated ("PWI"). PWI is a wholly-owned
subsidiary of PaineWebber Group Inc. ("PaineWebber"). The Associate General
Partner of the Partnership is Properties Associates 1985, L.P., a Virginia
limited partnership, certain limited partners of which are officers and
directors of PWPI.
The terms of transactions between the Partnership, the Managing General
Partner and its affiliates are set forth in Items 11 and 13 below to which
reference is hereby made for a description of such terms and transactions.
ITEM 2. PROPERTIES
As of March 31, 1995, the Partnership owns interests in three operating
properties through joint venture partnerships. The joint venture partnerships
and the related properties are referred to under Item 1 above to which reference
is made for the name, location and description of each property.
Occupancy figures for each fiscal quarter during 1995, along with an average
for the year, are presented below for each property:
Percent Occupied At
Fiscal 1995
6/30/94 9/30/94 12/31/94 3/31/95 Average
Fieldstone at Brandermill
Apartments 92% 91% 93% 99% 94%
Grayson Square Apartments 96% 96% 96% 91% 95%
Summerview Apartments 93% 90% 89% 88% 90%
ITEM 3. LEGAL PROCEEDINGS
In November 1994, a series of purported class actions (the "New York Limited
Partnership Actions') were filed in the United States District Court
for the Southern District of New York concerning PaineWebber Incorporated's sale
and sponsorship of various limited partnership investments, including those
offered by the Partnership. The lawsuits were brought against PaineWebber
Incorporated and Paine Webber Group Inc. (together `PaineWebber''), among
others, by allegedly dissatisfied partnership investors. In March 1995, after
the actions were consolidated under the title In re PaineWebber Limited
Partnership Litigation, the plaintiffs amended their complaint to assert claims
against a variety of other defendants, including Realty Southwest Investment
Group, III ("RSIG") and Properties Associates 1985, L.P. ("PA1985"), which are
the General Partners of the Partnership and affiliates of PaineWebber. On May
30, 1995, the court certified class action treatment of the claims asserted in
the litigation.
The amended complaint in the New York Limited Partnership Actions alleges
that, in connection with the sale of interests in Realty Southwest Fund III,
Ltd., PaineWebber, RSIG and PA1985 (1) failed to provide adequate disclosure of
the risks involved; (2) made false and misleading representations about the
safety of the investments and the Partnership's anticipated performance; and (3)
marketed the Partnership to investors for whom such investments were not
suitable. The plaintiffs, who purport to be suing on behalf of all persons who
invested in Realty Southwest Fund III, Ltd., also allege that following the sale
of the partnership interests, PaineWebber, RSIG and PA1985 misrepresented
financial information about the Partnership's value and performance. The
amended complaint alleges that PaineWebber, RSIG and PA1985 violated the
Racketeer Influenced and Corrupt Organizations Act (`RICO'') and the federal
securities laws. The plaintiffs seek unspecified damages, including
reimbursement for all sums invested by them in the partnerships, as well as
disgorgement of all fees and other income derived by PaineWebber from the
limited partnerships. In addition, the plaintiffs also seek treble damages
under RICO. The defendants' time to move against or answer the complaint has
not yet expired.
Pursuant to provisions of the Partnership Agreement and other contractual
obligations, under certain circumstances the Partnership may be required to
indemnify RSIG, PA1985 and their affiliates for costs and liabilities in
connection with this litigation. The General Partners intend to vigorously
contest the allegations of the action, and believe that the action will be
resolved without material adverse effect on the Partnership's financial
statements, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None. PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP INTERESTS AND RELATED
SECURITY HOLDER MATTERS
At March 31, 1995 there were 3,533 record holders of Units in the
Partnership. There is no public market for Units, and it is not anticipated
that a public market for Units will develop. The Managing General Partner will
not redeem or repurchase Units.
ITEM 6. SELECTED FINANCIAL DATA
REALTY SOUTHWEST FUND III, LTD.
FOR THE YEARS ENDED MARCH 31, 1995, 1994, 1993, 1992 AND 1991
(IN THOUSANDS EXCEPT PER UNIT DATA)
1995 1994 1993 1992 1991
Revenues $ 15 $ 13 $ 42 $ 28 $ 87
Operating loss $ (491) $ (351) $ (291) $ (331) $ (247)
Partnership's share
of ventures' losses $ (1,621) $ (6,079) $ (3,817) $ (7,361) $ (6,861)
Partnership's share of net
gains on transfers of
assets at foreclosure - $ 2,709 $ 2,873 - -
Gains on sale/assignment
of venture interests - $ 856 $ 5,033 - -
Income (loss) before
extraordinary gains $(2,112) $ (2,865) $ 3,798 $ (7,692) $ (7,109)
Extraordinary gains - $ 10,110 $ 5,675 $ 1,016 -
Net income (loss) $(2,112) $ 7,245 $ 9,473 $ (6,676) $ (7,109)
Per Limited
Partnership Unit:
Income (loss) before
extraordinary gains $(50.17) $ (83.39) $ 90.20 $(182.69) $(168.83)
Extraordinary gains - $ 221.13 $ 134.78 $ 24.14 -
Net income (loss) $ (50.17) $ 137.74 $ 224.98 $(158.55) $(168.83)
Total assets $ 55 $ 320 $ 267 $ 227 $ 577
The above selected financial data should be read in conjunction with the
financial statements and the related notes appearing elsewhere in this Annual
Report.
The above per Limited Partnership Unit information is based upon the 40,000
Limited Partnership Units outstanding during each year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership offered Limited Partnership Interests to the public from
December 28, 1984 to July 22, 1985 pursuant to a Registration Statement (No. 2-
93593) on Form S-11 filed under the Securities Act of 1933. Gross proceeds of
$40,000,000 were received by the Partnership, and, after deducting selling
expenses and offering costs, approximately $33,878,000 was invested in joint
venture partnerships which originally owned twelve operating investment
properties. The Partnership was structured to invest exclusively in newly-
constructed multi-family residential properties located primarily in the states
of Texas, California, Florida and Georgia and to employ substantial leverage in
making such acquisitions. The performance of the Partnership's investment
properties has been adversely impacted by an unprecedented and unforeseen
oversupply of competing apartments throughout the country in general and in the
local markets in which the properties are located. As of March 31, 1995, six
of the Partnership's original investment properties had been lost to
foreclosure and three investments had been sold or assigned for amounts which
yielded no significant proceeds to the Partnership. The three remaining
investments held as of the beginning of fiscal 1995
(Fieldstone, Grayson Square and Summerview) operated in compliance with their
debt agreements during the year, due to the low variable interest rate on the
Fieldstone debt and, in the case of Grayson Square and Summerview, the debt
restructuring agreements reached during fiscal 1990. However, none of the
properties would support conventional refinancings at their present debt
levels, which are well above the current estimates of property market values in
all cases. Consequently, management does not believe that the Partnership's
investments in these remaining properties have any material current or future
value given the outstanding debt obligations and, in certain cases, the
distribution priorities of the Partnership's co-venture partners. As a result
of these circumstances, and in light of the Partnership's limited cash
reserves, in October 1994 the Managing General Partner announced plans to
complete a liquidation of the Partnership. As part of the Partnership's
liquidation, its remaining investment interests were expected to be sold or
assigned, most likely only for nominal amounts. Since the operating costs to
be incurred by the Partnership through liquidation are expected to exceed any
sales proceeds received by the Partnership and the current balance of the
Partnership's cash reserves, no distribution will be made to the Limited
Partners. Completing the liquidation of the Partnership's interests in the
remaining properties has taken longer than originally anticipated due to the
legal complexities involved in the related joint venture and financing
agreements. Subsequent to year-end, in April 1995 the Partnership completed
the sale of its interest in the Fieldstone joint venture to the co-venture
partner for a cash payment of $50,000. The Partnership may receive similar
amounts in connection with the dispositions of the Grayson Square and
Summerview investments. It is expected that the formal liquidation of the
Partnership will be completed by the end of calendar 1995.
Until fiscal 1993, the Fieldstone joint venture had generated sizable
operating deficits. The interest rate on the venture's debt is variable and,
over the past 3 years, has declined to a level which allows the property to
produce excess cash flow. Prior deficits of the Fieldstone venture were funded
by the Partnership's co-venture partner under the optional loan provisions of
the joint venture agreement. These advances, which currently aggregate
approximately $939,000 (including accrued interest), bear interest and are
repayable as a first priority from the venture's cash flow or future sale or
refinancing proceeds. The current cash flow of the operating property implies
that the current value of the property is substantially below the amount of the
outstanding debt obligation. Over the past 2 years, management of the
Fieldstone joint venture has attempted to engage the mortgage lender in
discussion regarding a potential discounted prepayment of the loan in an effort
to create some long-term value to the venture's position. To date,
management's proposals have been rejected by the lender. Management of the
Partnership believes that the likelihood of there ever being any value to the
Partnership's subordinated equity position is remote. The co-venturer was
willing to pay the Partnership $50,000 for its interest in order to obtain
complete control over the affairs of the venture, to retain management of the
property and to defer potentially adverse tax and loan guaranty consequences.
The debt agreements of the Grayson Square and Summerview joint ventures were
restructured in October 1989 and August 1989, respectively. The principal
balance and accrued interest outstanding under the Grayson Square mortgage loan
totalled approximately $9.1 million as of December 31, 1994. This balance is
approximately $1.4 million higher than the debt level originally issued by the
joint venture in connection with the development of the property, which was
completed in January 1986. Such additional debt has resulted from the past
accumulation of accrued interest which the venture has been unable to pay due to
the lack of sufficient operating cash flow. Interest on the outstanding debt
balance accrues at a blended rate of approximately 8.5% per annum. The
venture's cash flow is not currently sufficient to fully cover this annual
interest expense. As a result, certain amounts continue to accrue and be added
to the outstanding obligation, as allowed under the terms of the debt agreement.
The balance of the debt service reserve fund established at the time of the
fiscal 1990 restructuring should be sufficient to allow the venture to remain in
compliance with its debt agreement for at least the next two years. However, in
the meantime, the total obligation due to the lender will continue to grow,
thereby further subordinating the venture's equity position. Furthermore, as
part of the 1990 negotiated modification agreement, the lender received a 50%
interest in future sale or refinancing proceeds above specified levels.
Analysis of the current cash flow from property operations would indicate that
the current value of the property is substantially below the outstanding debt
obligation. As a result of these circumstances, management does not believe
there is any value to the Partnership's interest in the Grayson Square property.
The Partnership has been negotiating with the co-venturer and certain third-
parties for the sale of its joint venture interest; however, no agreement has
been finalized to date. A third party may be willing to pay a nominal amount
for the Partnership's interest in order to obtain management of the property and
attempt to negotiate a discounted pay-off of the outstanding mortgage debt
obligation.
The $10.2 million mortgage obligation of the Summerview joint venture bears
interest at a fixed annual rate of 6.75% per annum. Cash flow from the
operations of the apartment complex does not fully cover the current debt
service requirements. For the past few years, the venture has struggled to
remain current on its debt service obligations by extending the payment periods
on its trade payables and deferring certain property maintenance expenses.
During fiscal 1995, the Partnership's co-venture partner contributed
approximately $40,000 to the venture because there was not sufficient cash to
make a required real estate tax payment. The result of the cash flow problems
has been that the property's physical appearance has deteriorated somewhat,
making it difficult to implement the necessary rental rate increases to improve
cash flow. Although the venture remained in compliance with its debt service
obligations during fiscal 1995, further cash flow deficits are projected for
fiscal 1996 and would require funding from the venture partners to avoid a
default under the loan agreement. Analysis of the property's operating cash
flow indicates that the current value of the property is substantially below the
principal balance of the debt. As a result, with little hope of there ever
being any value to the Partnership's investment interest, supporting cash flow
deficits under the current debt structure would not be economically prudent. The
Partnership has been involved in discussions with the co-venturer regarding the
possible sale of the Partnership's joint venture interest for $25,000; however,
no agreement has been finalized to date. If this transaction is not
consummated, the venture may allow the lender to take title to the operating
property through a non-judicial foreclosure proceeding.
At March 31, 1995, the Partnership had cash and cash equivalents of
approximately $29,000. Such cash and cash equivalents will be utilized for the
working capital requirements of the Partnership, including the payment of
liquidation-related expenses. The source of future liquidity is expected to be
through proceeds received from the sale or other disposition of the
Partnership's two remaining operating investment properties. Total expenses
incurred through the final liquidation date are expected to exceed available
cash (including proceeds from asset disposals). The Managing General Partner
intends to contribute the funds necessary to cover these final expenses.
RESULTS OF OPERATIONS
1995 Compared to 1994
The Partnership recorded a net loss of $2,112,000 for the year ended March
31, 1995, as compared to net income of $7,245,000 for the prior fiscal year.
This change in operating results is mainly due to gains of $13,675,000 resulting
from asset dispositions in fiscal 1994. As discussed further below,
dispositions in fiscal 1994 involved the Seascape, Pacific Glen, Oakridge and
Fountainhead properties. Although the transactions did not involve any
significant proceeds, the dispositions generated gains because the equity method
carrying values of the investments had been reduced below zero through prior
year loss recognition.
Excluding the fiscal 1994 gains on asset dispositions, the Partnership's
net operating results improved by $4,318,000 in fiscal 1995 due to a decrease in
the Partnership's share of ventures losses of $4,458,000. The combined losses
of the Partnership's joint ventures for the prior year include the operations of
four joint ventures in which the Partnership no longer holds an interest and in
which the Partnership's share of losses in the prior year totalled approximately
$4,715,000. The combined losses of the ventures exclusive of the operations of
these joint ventures and before amortization of the Partnership's excess basis,
decreased by $95,000 in the current year, primarily as a result of a decrease in
depreciation expense and real estate tax expense combined with an increase in
revenues. The decrease in combined depreciation expense is mainly due to
certain assets of the Summerview joint venture being fully depreciated. Also,
real estate taxes decreased at both the Summerview and Fieldstone joint ventures
during the current year. Revenues were up at Grayson Square and slightly at
Summerview generally due to small increases in rental rates achieved during the
year. Despite the decrease in operating losses at the three remaining ventures,
the Partnership's share of ventures' losses recognized in fiscal 1995 with
regard to these investments increased due to the write-off of the unamortized
amount of the Partnership's excess basis in the three investments. The write-
off, which was taken as a result of management's announced liquidation plan,
resulted in an increase in the Partnership's share of ventures' losses of
$352,000.
The Partnership's operating loss increased by $140,000 in fiscal 1995 due to
an increase in general and administrative expenses. General and administrative
expenses of the Partnership increased as a result of the accrual of certain
expenses associated with the planned liquidation of the Partnership. At March
31, 1995, $206,000 of expenses representing estimated costs for services to be
rendered through the Partnership's final liquidation date were accrued as a
result of management's announced liquidation plan. These costs include, among
other things, legal, accounting, tax preparation, securities law compliance,
investor communications, printing and audit expenses.
1994 Compared to 1993
The Partnership recorded net income of $7,245,000 for the year ended March
31, 1994, as compared to net income of $9,473,000 for the fiscal year ended
March 31, 1993. This change in operating results is mainly due to an increase
in the Partnership's share of ventures' losses of approximately $2,262,000 and a
slight increase in the Partnership's operating loss of approximately $60,000.
Aggregate gains resulting from asset dispositions totalled approximately
$13,675,000 in fiscal 1994 and approximately $13,581,000 in fiscal 1993.
Dispositions in fiscal 1994 involved the Seascape, Pacific Glen, Oakridge and
Fountainhead properties. Dispositions in fiscal 1993 involved the sale of the
venture interest in the Fifth Seasons property on October 20, 1992 and the
foreclosures of the Windsor Park and Forestwood apartment complexes on January
14, 1993 and March 5, 1993, respectively.
During fiscal year 1993 the Partnership recorded extraordinary gains of
approximately $5,675,000 related to the settlement of debt obligations in
connection with the foreclosures of Windsor Park ($3,736,000) and Forestwood
($1,939,000). In fiscal year 1994 extraordinary gains, totalling $10,110,315,
represent the Partnership's share of the gains from the settlement of debt
obligations recorded in connection with the foreclosures of Pacific Glen
($1,197,000), Oakridge ($2,827,000), and Seascape ($6,086,000). The transfers
of title to the lenders through these proceedings in both years have been
accounted for as troubled debt restructurings in accordance with Statement of
Financial Accounting Standard No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings." The extraordinary gains arise due to the fact
that the balance of the mortgage loans and related accrued interest exceeded the
estimated fair value of the properties and certain other assets transferred to
the lenders at the dates of foreclosures. The Partnership also recorded a net
gain of $2,709,000 in fiscal 1994 related to its share of the gains attributable
to the transfers of assets to the lenders of the Pacific Glen, Oakridge and
Seascape properties at foreclosure. This net gain, accounted for in accordance
with SFAS No. 15, resulted from the fact that the aggregate net carrying values
of the land, building and improvements were less than the aggregate estimated
fair values of the investment properties at the time of the foreclosures. In
fiscal 1993, the Partnership's share of these gains, of $2,873,000, related to
the transfer of the Windsor Park and Forestwood apartments to their respective
lenders at foreclosure. In addition, the Partnership recorded a gain of
$856,000 in fiscal 1994 in connection with the assignment of the Partnership's
interest in the Fountainhead joint venture, due to the fact that the carrying
value of the Partnership's investment in Fountainhead under the equity method
was negative at the time of its assignment. The fiscal 1993 gain on sale
related to the sale of the Partnership's interest in the Fifth Season joint
venture and represented the sum of the cash proceeds received and the negative
carrying value of the investment interest at the time of the sale.
The increase in the Partnership's share of ventures' losses can be
primarily attributed to an increase in interest expense recognized by the
Pacific Glen joint venture during fiscal 1994. The combined losses of the
ventures, exclusive of the foreclosure gains discussed above, increased by
$2,262,000 in fiscal 1994. The combined losses of the Partnership's joint
ventures for fiscal 1993 include the operations of three joint ventures in which
the Partnership did not hold an interest during fiscal 1994 and in which the
Partnership's share of losses in the prior year totalled $1,450,000. The
combined losses of the ventures exclusive of the operations of these three joint
ventures, increased by $3,680,000 in fiscal 1994, primarily as a result of an
increase in interest expense, offset by a slight increase in revenues. The
increase in combined interest expense in fiscal 1994 is entirely due to the
cumulative effect of the prior period non-recognition of interest expense on the
debt secured by the Pacific Glen Apartments. Under generally accepted
accounting principles, entities in reorganization under the Bankruptcy Code are
generally required to record interest expense only to the extent that it is
probable that such interest expense will be paid in cash. No amounts were
recorded in fiscal 1993 because it had not been determined that the cash payment
of such interest expense was probable. However, at the time of the settlement
of the debt obligation and the transfer of title in connection with the
foreclosure of Pacific Glen in fiscal 1994, certain cash balances which had been
held by the venture and the Receiver were paid to the lender and applied against
the venture's outstanding indebtedness. Such balances, which represented over
two full years of the property's net operating cash flow, totalled approximately
$5.1 million and were reflected as interest expense in fiscal 1994.
1993 Compared to 1992
The Partnership recorded net income of $9,473,000 for the year ended March
31, 1993, as compared to a net loss of approximately $6,676,000 for the prior
year. Contributing to this change in net operating results was the recognition
in fiscal 1993 of extraordinary gains totalling $5,675,000. The Partnership
recorded an extraordinary gain of $1,016,000 in the prior year related to the
sale of the Hollows Apartments and the discounted settlement of the related
mortgage debt obligation. As discussed above, the fiscal 1993 extraordinary
gains represent the Partnership's share of the gains from the settlement of
debt obligations recorded in connection with the foreclosures of Windsor Park
($3,736,000) and Forestwood ($1,939,000). The Partnership recorded income
before extraordinary gains of $3,798,000 for fiscal 1993 as compared to a loss
of $7,692,000 for the prior year. The sale of the Partnership's interest in the
Fifth Seasons joint venture contributed to this change. The Partnership
recorded a gain of $5,034,000 in fiscal 1993, despite receiving proceeds of
only $300,000, due to the fact that the equity method carrying value of the
Partnership's investment in Fifth Seasons was negative at the time of sale.
The change in income (loss) before extraordinary gains was also partially due
to the Partnership's share of the gains on the transfer of assets to the
lenders of the Windsor Park and Forestwood Apartments at foreclosure, of
$253,000 and $2,620,000, respectively. Also contributing to this change in
results prior to extraordinary items, was a decrease in the Partnership's share
of ventures' losses of $3,543,000. The combined losses of the ventures,
exclusive of the foreclosure gains discussed above, decreased by $3,340,000 in
fiscal 1993, primarily as a result of an increase in combined revenues of
$558,000, a decrease in interest expense of $1,769,000, a decrease in equity in
losses from unconsolidated real estate partnerships of $839,000 and a gain of
$262,000 recorded from the transfer of interest in the Fountainhead equity
partnership. In addition, the Partnership's share of ventures' losses in
fiscal 1992 included the write-off of the unamortized balance of certain costs,
totalling approximately $1 million, capitalized in connection with the
acquisition of the Partnership's joint venture investments which were in
default of their debt agreements as of March 31, 1992.
The increase in combined revenues reflected a slight improvement in certain
of the local real estate markets in which the Partnership's properties are
located during fiscal 1993. The decline in interest expense resulted primarily
from the nonrecognition of $2,349,000 of interest expense for fiscal 1993 on
the debt secured by the Pacific Glen Apartments. Under generally accepted
accounting principles, entities in reorganization under the Bankruptcy Code are
generally required to record interest expense only to the extent that it is
probable that such interest expense will be paid in cash. No amounts were
recorded in calendar 1992 because it had not been determined that the cash
payment of such interest expense was probable. The equity in losses from
unconsolidated real estate partnerships reflected the combined joint ventures'
share of the operating results of the Hollows and Fountainhead properties,
which are or were owned by other ventures in which the Partnership is not the
majority partner. The decrease in these losses was partially attributable to
the sale of the Hollows II Apartments during fiscal 1992. In addition, the
Fountainhead joint venture recognized a gain of $262,000 in fiscal 1993 from
transferring part of its ownership interest in the entity which owns the
Fountainhead I Apartments. The Partnership and its original co-venture partner
chose not to participate in capital calls by the Fountainhead joint venture to
fund debt refinancing expenses for the operating property in fiscal 1993. The
Partnership's share of the gain from the transfer of interest in Fountainhead
totalled $231,000.
INFLATION
The Partnership completed its tenth full year of operations in fiscal 1995.
The effects of inflation and changes in prices on the Partnership's operating
results to date have not been significant.
Inflation in future periods may increase revenues as well as operating
expenses at the Partnership's operating investment properties. Rental rates at
the Partnership's apartment properties can be adjusted to keep pace with
inflation, to the extent market conditions allow, as the leases, which are
generally one year or less in duration, are renewed or turned over. Such
increases in rental revenues would be expected to at least partially offset the
corresponding increases in Partnership and property operating expenses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are included under Item 14
of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None. PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
The Managing General Partner of the Partnership, Realty Southwest Investment
Group III, is a Texas general partnership composed of Realty Southwest
Investment Group III Inc., a Delaware corporation (`RSIG''), Lawrence S. Kash,
and W. A. Daniel, Jr., all of whom are affiliates or former affiliates of RSIG.
RSIG is wholly-owned by PaineWebber Properties Incorporated (`PWPI''), a
Delaware corporation. PWPI is wholly-owned by PaineWebber Incorporated
(`PWI''), and PWI is wholly-owned by PaineWebber Group Inc. (``PaineWebber'').
The Managing General Partner has responsibility for all aspects of the
Partnership's operations, subject to the requirement that purchases and sales of
real property or acquisitions of joint venture interests must be approved by a
majority of the Directors of RSIG, as well as by Properties Associates 1985,
L.P., a Virginia limited partnership, which is the Associate General Partner of
the Partnership.
(a) and (b) The names and ages of the directors and officers of the
Managing General Partner of the Partnership are as follows:
Date elected
Name Office Age to Office
Lawrence A. Cohen President, Chief Executive
Officer and Sole Director 41 5/91
Walter V. Arnold Senior Vice President,
Chief Financial
Officer and Treasurer 47 2/89
Dorothy F. Haughey Secretary 69 2/89
Geraldine L. Banyai Assistant Secretary 55 7/93
Magaly Brabner Assistant Secretary 64 2/89
Linda MacDonald Assistant Secretary 34 2/89
(c) There are no other significant employees in addition to the directors
and officers mentioned above.
(d) There is no family relationship among any of the foregoing directors
or officers of the Managing General Partner of the Partnership. All of the
foregoing directors and officers have been elected to serve until the annual
meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold
similar positions in affiliates of the Managing General Partner, which are the
corporate general partners of other real estate limited partnerships sponsored
by PWI, and for which Paine Webber Properties Incorporated serves as the
Adviser. The business experience of each of the directors and officers of the
Managing General Partner is as follows:
Lawrence A. Cohen is President, Chief Executive Officer and Sole Director
of the Managing General Partner and President and Chief Executive Officer of
PWPI. Mr. Cohen joined PWPI in January 1989 as its Executive Vice President
and Director of Marketing and Sales. He is also a member of the Board of
Directors and the Investment Committee of PWPI. From 1984 to 1988, Mr. Cohen
was First Vice President of VMS Realty Partners where he was responsible for
origination and structuring of real estate investment programs and for managing
national broker-dealer relationships. Mr. Cohen received his LL.M (in
Taxation) from New York University School of Law and his J.D. degree from St.
John's University School of Law. Mr. Cohen received his B.B.A degree in
Accounting from George Washington University. He is a member of the New York
Bar and is a Certified Public Accountant.
Walter V. Arnold is the Senior Vice President, Chief Financial Officer and
Treasurer of the Managing General Partner and a Senior Vice President and Chief
Financial Officer of PWPI which he joined in October 1985. Mr. Arnold joined
PWI in 1983 with the acquisition of Rotan Mosle, Inc., where he had been First
Vice President and Controller since 1978, and where he continued until joining
PWPI. Mr. Arnold is a Certified Public Accountant licensed in the state of
Texas.
Geraldine L. Banyai is Assistant Secretary of the Managing General Partner,
Assistant Secretary of PWI and Assistant Secretary of PWPI. Ms. Banyai joined
PWI in 1993. Prior to joining PWI, Ms. Banyai had worked for many years as a
Corporate Secretary at the Meritor Savings Bank in Philadelphia.
Dorothy J. Haughey is Secretary of the Managing General Partner, Assistant
Secretary of PaineWebber and Secretary of PWI and PWPI. Ms. Haughey joined
PaineWebber in 1962.
Magaly Brabner is an Assistant Secretary of the Managing General Partner
and is responsible for the legal administration and corporate structure of the
Managing General Partner. Ms. Brabner joined PaineWebber in 1983 with the
acquisition of Rotan Mosle, Inc.
Linda MacDonald is an Assistant Secretary of the Managing General Partner
and an Assistant Vice President and Assistant Secretary of PWPI, which she
joined in 1981. Ms. MacDonald is responsible for the administration of PWPI's
Boston office.
(f) None of the directors and officers were involved in legal proceedings
which are material to an evaluation of her or his ability or integrity as a
director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities
Exchange Act of 1934 requires the officers and directors of the Managing
General Partner, and persons who own more than ten percent of the Partnership's
limited partnership units, to file certain reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
ten-percent beneficial holders are required by SEC regulations to furnish the
Partnership with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Partnership believes that, during the year ended March 31, 1995, all filing
requirements applicable to the officers and directors of the Managing General
Partner and ten-percent beneficial holders were complied with.
ITEM 11. EXECUTIVE COMPENSATION
The directors and officers of the Partnership's Managing General Partner
received no current or proposed remuneration from the Partnership.
The General Partners are entitled to receive a share of cash distributions
and a share of profits and losses. These items are described under Item 13.
The Partnership has never paid any distributions to the Limited Partners.
Furthermore, the Partnership's Limited Partnership Units are not actively
traded on any organized exchange, and no efficient secondary market exists.
Accordingly, no accurate price information is available for these Units.
Therefore, a presentation of historical unitholder total returns would not be
meaningful.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The Partnership is a limited partnership issuing Units of limited
partnership interest, not voting securities. All the outstanding stock of RSIG
is owned by an affiliate as set forth in Item 10. Properties Associates 1985,
L.P., the Associate General Partner, is a Virginia limited partnership, certain
limited partners of which are also officers and directors of PaineWebber
Properties Incorporated and the Managing General Partner. No limited partner
is known by the Partnership to own beneficially more than 5% of the outstanding
interests of the Partnership.
(b) Neither the officers and directors of the Managing General Partner,
nor the limited partners of the Associate General Partner, individually, own
any Units of limited partnership interest of the Partnership. Neither the
officers and directors of the Managing General Partner, nor the limited
partners of the Associate General Partner, possesses a right to acquire
beneficial ownership of Units of limited partnership interest of the
Partnership.
(c) There exists no arrangement, known to the Partnership, the operation
of which may, at a subsequent date, result in a change in control of the
Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Managing General Partner of the Partnership is Realty Southwest
Investment Group III, a Texas general partnership composed of Realty Southwest
Investment Group III Inc. and certain former officers of PaineWebber Properties
Incorporated ("PWPI"). Realty Southwest Investment Group III Inc., a Delaware
corporation, is wholly-owned by PWPI, which is a wholly-owned subsidiary of
PaineWebber Incorporated ("PWI"). PWI is a wholly-owned subsidiary of
PaineWebber Group, Inc. ("PaineWebber"). The Associate General Partner is
Properties Associates 1985, L.P., a Virginia limited partnership, certain
limited partners of which are officers and directors of PWPI. The General
Partners and their affiliates are entitled to receive fees and compensation,
determined on an agreed-upon basis, in consideration of various services
performed in connection with the sale of the Units and the acquisition and
disposition of the Partnership's investments. The Managing General Partner
and its affiliates are reimbursed for their direct out-of-pocket expenses
relating to the administration of the Partnership and the acquisition and
operation of the Partnership's real property investments.
Pursuant to the terms of the Partnership Agreement, distributable cash from
operations, if any, will be distributed quarterly. Distributable cash from
operations will first be distributed 99% to the Limited Partners and 1% to the
General Partners until the Limited Partners have received a 6% per annum
noncompounded, noncumulative return on their invested capital in the
Partnership. Second, distributable cash from operations will be distributed to
the General Partners until the General Partners have received an amount which,
when added to amounts distributed above, will result in the General Partners
receiving 5% of the distributed cash from operations for the fiscal year. Any
remaining distributable cash from operations will be distributed 95% to the
Limited Partners and 5% to the General Partners.
Net proceeds of capital transactions (defined as the net proceeds of any
financing, refinancing, sale or other disposition of any Partnership property)
will not be reinvested. The Partnership may, however, use all or part of such
net proceeds of capital transactions to construct or refurbish improvements on
other improved properties already owned by the Partnership. Otherwise, all net
proceeds of capital transactions will (i) first, be distributed to the Limited
Partners until they have received an amount equal to their invested capital at
that time in the Partnership plus an amount equal to an 8% per annum
noncompounded cumulative return on their invested capital in the Partnership
(after taking into account prior distributions of net proceeds of capital
transactions and distributable cash from operations); (ii) second, proceeds will
be distributed to the General Partners until they have received an amount equal
to 5% of all distributions actually made to the Partners under (i) above and to
the extent the General Partners did not receive 5% of distributable funds from
operations in each preceding year; and (iii) third, any remaining proceeds will
be distributed 95% to the Limited Partners and 5% to the General Partners.
An affiliate of the Managing General Partner performs certain accounting,
tax preparation, securities law compliance and investor communications and
relations services for the Partnership. The total costs incurred by this
affiliate in providing such services are allocated among several entities,
including the Partnership. Included in general and administrative expenses for
the year ended March 31, 1995 is $98,000, representing reimbursements to this
affiliate of the Managing General Partner for providing such services to the
Partnership during fiscal 1995. In addition, included in general and
administrative expenses for fiscal 1995 is $93,000 of accrued reimbursements to
this affiliate for services to be rendered through the Partnership's final
liquidation date.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an
independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees
of $2,000 (included in general and administrative expenses) for managing the
Partnership's cash assets during fiscal 1995. Fees charged by Mitchell Hutchins
are based on a percentage of invested cash reserves which varies based on the
total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.
In addition, included in general and administrative for fiscal 1995 is $1,000,
representing an estimate of fees to be earned by Mitchell Hutchins for managing
the Partnership's cash assets through its final liquidation date.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) & (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements and Financial Statement Schedules at page F-1.
(3) Exhibits:
The exhibits listed on the accompanying index to exhibits at
page IV-3 are filed as part of the Report.
(b) No Current Reports on Form 8-K were filed during the last quarter of
fiscal 1995.
(c) Exhibits
See (a) (3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this report. See Index to Financial
Statements and Financial Statement Schedules at page F-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
REALTY SOUTHWEST FUND III, LTD.
By: Realty Southwest Investment Group III
General Partner
By: Realty Southwest Investment Group III, Inc.
Managing General Partner
By: /s/ Lawrence A. Cohen
Lawrence A. Cohen
President and
Chief Executive Officer
By: /s/ Walter V. Arnold
Walter V. Arnold
Senior Vice President and
Chief Financial Officer
Dated: June 28, 1995
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 Partnership and
in the capacities and on the dates indicated.
By: /s/ Lawrence A. Cohen Date: June 28, 1995
Lawrence A. Cohen
Director
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(3)
REALTY SOUTHWEST FUND III, LTD.
INDEX TO EXHIBITS
Page Number in the Report
Exhibit No. Description of Document Or Other Reference
(3) and (4)Prospectus of the Partnership Filed with the Commission
dated December 28, 1984, as pursuant to Rule 424(c) and
supplemented, with particular incorporated herein by reference.
reference to the Restated
Certificate and Agreement of
Limited Partnership
(10) Material contracts previously Filed with the Commission
filed as exhibits to registration pursuant to Section 13 or 15(d)
statements and amendments thereto of the Securities Act of 1934 and
of the registrant together with incorporated herein by reference.
all such contracts filed as
exhibits of previously filed
Forms 8-K and Forms 10-K are
hereby incorporated
herein by reference.
(13) Annual Report to Limited Partners No Annual Report for the
fiscal year ended March 31, 1995
has been sent to the Limited
Partners. An Annual Report
will be sent subsequent to
this filing.
(22) List of subsidiaries Included in Item I of Part I of
this Report Page I-1 and I-2,
to which reference is hereby
made.
ANNUAL REPORT ON FORM 10-K
ITEM 14(A) (1) AND (2) AND 14(D)
REALTY SOUTHWEST FUND III, LTD.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference
REALTY SOUTHWEST FUND III, LTD.:
Report of independent auditors F-2
Balance sheets as of March 31, 1995 and 1994 F-3
Statements of operations for the years ended
March 31, 1995, 1994 and 1993 F-4
Statements of changes in partners' deficit for
the years ended March 31, 1995, 1994 and 1993 F-5
Statements of cash flows for the years ended
March 31, 1995, 1994 and 1993 F-6
Notes to financial statements F-7
1994 AND 1993 COMBINED JOINT VENTURES OF REALTY SOUTHWEST FUND III, LTD.:
Report of independent auditors F-17
Combined balance sheet as of December 31, 1994 and 1993 F-18
Combined statement of operations and changes in
venturers' deficit for the year ended December 31,
1994 and 1993 F-19
Combined statement of cash flows for the
year ended December 31, 1994 and 1993 F-20
Notes to combined financial statements F-21
Schedule III - Combined Real Estate and Accumulated
Depreciation F-28
1992 COMBINED JOINT VENTURES OF REALTY SOUTHWEST FUND III, LTD.:
Report of independent auditors F-29
Combined balance sheet as of December 31, 1992 F-30
Combined statement of operations and changes in
venturers' deficit for the year ended December 31, 1992 F-31
Combined statement of cash flows for the year ended
December 31, 1992 F-32
Notes to combined financial statements F-33
Schedule III - Combined Real Estate and Accumulated
Depreciation F-43
Other schedules have been omitted since the required information is not present
or not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the financial statements,
including the notes thereto.
REPORT OF INDEPENDENT AUDITORS
The Partners
Realty Southwest Fund III, Ltd.:
We have audited the accompanying balance sheets of Realty Southwest Fund
III, Ltd. as of March 31, 1995 and 1994, and the related statements of
operations, changes in partners' deficit and cash flows for each of the three
years in the period ended March 31, 1995. 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 and schedule
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 Realty Southwest Fund III,
Ltd. at March 31, 1995 and 1994 and the results of its operations and its cash
flows for each of the three years in the period ended March 31, 1995 in
conformity with generally accepted accounting principles.
As more fully described in Notes 1 and 4 to the financial statements, the
Partnership has incurred recurring operating losses and has a capital
deficiency. In addition, while the Partnership's remaining joint venture
investees are operating in compliance with their mortgage debt agreements as of
March 31, 1995, management has stated that there is no material current
value to the Partnership's position in the related operating investment
properties above the amounts of the outstanding debt obligations. As a result
of these circumstances, the Partnership announced a plan of liquidation during
fiscal 1995. Accordingly, there is substantial doubt about the ability of the
Partnership to continue as a going concern. The accompanying financial
statements do not include any adjustments to reflect the future effects of the
planned liquidation of the Partnership on the classification of liabilities
that might result from the inability of the Partnership to continue as a going
concern.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
June 28, 1995
REALTY SOUTHWEST FUND III, LTD.
BALANCE SHEETS
March 31, 1995 and 1994
(In Thousands, except for per Unit data)
ASSETS
1995 1994
Cash and cash equivalents $ 29 $ 299
Accounts receivable - affiliates 26 21
$ 55 $ 320
LIABILITIES AND PARTNERS' DEFICIT
Equity in losses of joint ventures
subject to liquidation $ 11,202 $ 9,581
Accounts payable - affiliates 94 -
Accounts payable and accrued expenses 156 24
Total liabilities 11,452 9,605
Partners' deficit:
General Partners:
Cumulative net loss (962) (856)
Limited Partners ($1,000 per unit;
40,000 Units issued):
Capital contributions, net of offering costs 35,304 35,304
Cumulative net loss (45,739) (43,733)
Total partners' deficit (11,397) (9,285)
$ 55 $ 320
See accompanying notes.
REALTY SOUTHWEST FUND III, LTD.
STATEMENTS OF OPERATIONS
For the years ended March 31, 1995, 1994 and 1993
(In Thousands, except per Unit data)
1995 1994 1993
REVENUES:
Interest income $ 8 $ 8 $ 9
Other income 7 5 33
15 13 42
EXPENSES:
General and administrative 506 364 333
Operating loss (491) (351) (291)
Partnership's share of ventures' losses (1,621) (6,079) (3,817)
Partnership's share of net gains
on transfers of assets at foreclosure - 2,709 2,873
Gains on sale/assignment of
venture interests - 856 5,033
Income (loss) before extraordinary gains (2,112) (2,865) 3,798
Partnership's share of extraordinary
gains on settlement of debt obligations - 10,110 5,675
NET INCOME (LOSS) $ (2,112) $ 7,245 $ 9,473
Per Limited Partnership Unit:
Income (loss) before
extraordinary gains $ (50.17) $ (83.39) $ 90.20
Partnership's share of
extraordinary gains on settlement
of debt obligations - 221.13 134.78
Net income (loss) $ (50.17) $ 137.74 $ 224.98
The above per Limited Partnership Unit information is based upon the 40,000
Limited Partnership Units outstanding during each year.
See accompanying notes.
REALTY SOUTHWEST FUND III, LTD.
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the years ended March 31, 1995, 1994 and 1993
(In Thousands)
General Limited
Partners Partners Total
Balance at March 31, 1992 $ (3,065) $ (22,938) $ (26,003)
Net income 474 8,999 9,473
BALANCE AT MARCH 31, 1993 (2,591) (13,939) (16,530)
Net income 1,735 5,510 7,245
BALANCE AT MARCH 31, 1994 (856) (8,429) (9,285)
Net loss (106) (2,006) (2,112)
BALANCE AT MARCH 31, 1995 $ (962) $ (10,435) $(11,397)
See accompanying notes.
REALTY SOUTHWEST FUND III, LTD.
STATEMENTS OF CASH FLOWS
For the years ended March 31, 1995, 1994 and 1993
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
1995 1994 1993
Cash flows from operating activities:
Net income (loss) $ (2,112) $7,245 $9,473
Adjustments to reconcile net
income (loss) to net cash
used for operating activities:
Partnership's share of
ventures' losses 1,621 6,079 3,817
Partnership's share of net gains on
transfers of assets at foreclosure - (2,709) (2,873)
Gains on sale/assignment of
venture interests - (856) (5,033)
Partnership's share of extraordinary
gains on settlement of debt obligations - (10,110) (5,675)
Changes in assets and liabilities:
Accounts receivable - affiliates (5) (5) (5)
Accrued interest receivable - - 1
Accounts payable - affiliates 94 (26) 22
Accounts payable - third parties 71 - -
Accrued expenses 61 (20) 9
Total adjustments 1,842 (7,647) (9,737)
Net cash used for
operating activities (270) (402) (264)
Cash flows from investing activities:
Proceeds from sale of joint
venture interest - - 300
Distributions from joint ventures - 450 -
Net cash provided by
investing activities - 450 300
Net increase (decrease) in
cash and cash equivalents (270) 48 36
Cash and cash equivalents,
beginning of year 299 251 215
Cash and cash equivalents, end of year $ 29 $ 299 $ 251
See accompanying notes.
1. Organization and Planned Liquidation
Realty Southwest Fund III, Ltd. (the ``Partnership'') is a Texas limited
partnership organized pursuant to the laws of the State of Texas on August
13, 1984 for the purpose of investing in a diversified portfolio of newly-
constructed and to-be-constructed income-producing operating properties.
The Partnership authorized the issuance of units (the ``Units') of
Partnership interests (at $1,000 per Unit) of which 40,000 were subscribed
and issued between December 28, 1984 and July 22, 1985.
The Partnership was structured to invest exclusively in multi-family
residential properties located primarily in the states of Texas, California,
Florida and Georgia and to employ substantial leverage in making such
acquisitions. The Partnership originally invested the net proceeds of the
offering, through joint venture partnerships, in twelve rental apartment
properties. As discussed further in Note 4, the Partnership's operating
properties have encountered major adverse business developments which,
through March 31, 1995, had resulted in the loss of six of the original
investments to foreclosure and the sale or assignment of interests in three
other joint ventures for amounts which yielded no significant proceeds to
the Partnership. In addition, while certain of the remaining ventures have
obtained more favorable financing terms, the ability of the remaining joint
ventures to continue their operations may be dependent upon the further
modification of the loan agreements, improved property performance, and the
continued financial support of the joint venture partners. As a result of
these circumstances, and in light of the Partnership's limited cash
reserves, in October 1994 the Managing General Partner announced plans to
complete a liquidation of the Partnership. Such liquidation is expected to
be completed by the end of calendar 1995. Subsequent to year-end, in April
1995, the Partnership sold its interest in the Fieldstone at Brandermill
joint venture for a cash payment of $50,000. As part of the Partnership's
liquidation, its two remaining investment interests (Grayson Square and
Summerview) will be sold or assigned, most likely only for nominal amounts.
Since the costs of liquidation are expected to exceed any sales proceeds
received by the Partnership and the current balance of the Partnership's
cash reserves, no distribution will be made to the Limited Partners. As a
result of these circumstances, there is substantial doubt about the ability
of the Partnership to continue as a going concern. The accompanying
financial statements do not include any adjustments to reflect the future
effects of the planned liquidation of the Partnership on the classification
of liabilities that might result from the inability of the Partnership to
continue as a going concern.
2. Summary of Significant Accounting Policies
The accompanying financial statements at March 31, 1995 include the
Partnership's investments in joint venture partnerships which have interests
in three operating properties. The Partnership accounts for its investments
in the joint ventures using the equity method because the Partnership does
not have majority voting control. Under the equity method an investment is
carried at cost adjusted for the Partnership's share of the joint venture's
earnings and losses and distributions. See Note 4 for a description of the
joint ventures and operating properties.
The joint ventures in which the Partnership has invested are required to
maintain their accounting records on a calendar year basis for income tax
purposes. As a result, the Partnership records its share of ventures'
earnings and losses based on financial information of the ventures which is
three months in arrears to that of the Partnership, except for significant
lag-period transactions, which are included in the Partnership's results of
operations for the fiscal year in which they occur (see Note 4).
For purposes of reporting cash flows, the Partnership considers all highly
liquid investments with original maturities of 90 days or less to be cash
equivalents.
No provision for income taxes has been made as the liability for such
taxes is that of the partners rather than the Partnership. Upon the sale or
disposition of the Partnership's investments, the taxable gain or loss
incurred will be allocated among the partners. In certain cases, the
Limited Partners could be allocated taxable income in excess of any
liquidation proceeds that they may receive. Additionally, in cases where
the disposition of an investment involves a foreclosure by, or voluntary
conveyance to, the mortgage lender, taxable income could occur without
distribution of cash. Income from the sale or disposition of the
Partnership's investments would represent passive income to the partners
which could be offset by each partners' existing passive losses, including
any carryovers from prior years.
3. The Partnership Agreement and Related Party Transactions
The Managing General Partner of the Partnership is Realty Southwest
Investment Group III, a Texas general partnership composed of Realty
Southwest Investment Group III Inc. and certain former officers of
PaineWebber Properties Incorporated ("PWPI"). Realty Southwest Investment
Group III Inc., a Delaware corporation, is wholly-owned by PWPI, which is a
wholly-owned subsidiary of PaineWebber Incorporated ("PWI"). PWI is a
wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber"). The
Associate General Partner is Properties Associates 1985, L.P., a Virginia
limited partnership, certain limited partners of which are officers and
directors of PWPI. The General Partners and their affiliates are entitled
to receive fees and compensation, determined on an agreed-upon basis, in
consideration of various services performed in connection with the sale of
the Units and the acquisition and disposition of the Partnership's
investments.
The General Partners and their affiliates are reimbursed for any direct
expenses relating to the offering of Units, the administration of the
Partnership and the acquisition and operations of the Partnership's real
property investments.
In connection with investing Partnership capital in real properties, PWPI
earned acquisition fees equal to $2,000,000, or 5% of the gross proceeds of
the offering.
Pursuant to the terms of the Partnership Agreement, distributable cash
from operations, if any, will be distributed quarterly. Distributable cash
from operations will first be distributed 99% to the Limited Partners and 1%
to the General Partners until the Limited Partners have received a 6% per
annum noncompounded, noncumulative return on their invested capital in the
Partnership. Second, distributable cash from operations will be distributed
to the General Partners until the General Partners have received an amount
which, when added to amounts distributed above, will result in the General
Partners receiving 5% of the distributed cash from operations for the fiscal
year. Any remaining distributable cash from operations will be distributed
95% to the Limited Partners and 5% to the General Partners.
Net proceeds of capital transactions (defined as the net proceeds of any
financing, refinancing, sale or other disposition of any Partnership
property) will not be reinvested. The Partnership may, however, use all or
part of such net proceeds of capital transactions to construct or refurbish
improvements on other improved properties already owned by the Partnership.
Otherwise, all net proceeds of capital transactions will (i) first, be
distributed to the Limited Partners until they have received an amount equal
to their invested capital at that time in the Partnership plus an amount
equal to an 8% per annum noncompounded cumulative return on their invested
capital in the Partnership (after taking into account prior distributions of
net proceeds of capital transactions and distributable cash from
operations); (ii) second, proceeds will be distributed to the General
Partners until they have received an amount equal to 5% of all distributions
actually made to the Partners under (i) above and to the extent the General
Partners did not receive 5% of distributable funds from operations in each
preceding year; and (iii) third, any remaining proceeds will be distributed
95% to the Limited Partners and 5% to the General Partners.
For federal income tax purposes, profits (other than from capital
transactions), all net losses and investment tax credits of the Partnership
will be allocated 95% to the Limited Partners and 5% to the General
Partners; provided, however, that an amount of operating profits for any
year equal to the operating cash flow distributed to the Partners for such
year will first be allocated in the ratio in which the cash is distributed,
with any additional operating profits for such year to be allocated 95% to
the Limited Partners and 5% to the General Partners. Taxable income arising
from a sale or refinancing of investment properties will generally be
allocated between the Limited Partners and the General Partners first, to
the extent of and in the ratio of their deficit capital accounts. Second,
gains are to be allocated in such amounts as are necessary to bring the
General Partners' capital account balance in the ratio of 5:95 to the
Limited Partners' capital account balances. Third, any remaining gains and
all losses resulting from a sale or refinancing transaction are to be
allocated 95% to the Limited Partners and 5% to the General Partners.
Allocations of the Partnership's operations between the General Partners and
the Limited Partners for financial reporting purposes have been made in
conformity with the allocations of taxable income or loss.
Included in general and administrative expenses for the years ended March
31, 1995, 1994 and 1993 is $98,000, $104,000 and $118,000, respectively,
representing reimbursements to an affiliate of the Managing General Partner
for providing certain financial, accounting and investor communication
services to the Partnership. In addition, included in general and
administrative expenses for fiscal 1995 is $93,000 of accrued reimbursements
to this affiliate for services to be rendered through the Partnership's
final liquidation date.
The Partnership uses the services of Mitchell Hutchins Institutional
Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management,
Inc., an independently operated subsidiary of PaineWebber. Mitchell
Hutchins earned fees of $2,000, $1,000 and $2,000 (included in general and
administrative expenses) for managing the Partnership's cash assets during
fiscal 1995, 1994 and 1993, respectively. In addition, included in general
and administrative expenses for fiscal 1995 is $1,000, representing
estimated fees to be earned by Mitchell Hutchins for managing the
Partnership's cash assets through its final liquidation date.
Accounts receivable - affiliates at March 31, 1995 and 1994 consists of
amounts due from certain joint ventures for investor servicing fees, in
accordance with the terms of the joint venture agreements. Accounts payable
- affiliates at March 31, 1995 consists of the $94,000 of estimated expenses
referred to above payable to PWPI and Mitchell Hutchins for services to be
rendered through the expected liquidation of the Partnership.
4. Investments in Joint Venture Partnerships
As of March 31, 1995 and 1994, the Partnership had investments in joint
ventures which owned three operating investment properties. As discussed
further below, subsequent to year-end, in April 1995, the Partnership sold
its interest in the Fieldstone at Brandermill joint venture to the co-
venture partner for a cash payment of $50,000. Also as discussed further
below, during fiscal 1994 the ownership of the Seascape, Pacific Glen and
Oakridge apartment complexes was transferred from the respective joint
ventures to the lender due to the inability of the joint ventures to meet
the debt service requirements of their mortgage loans. The debt obligations
of the Seascape, Pacific Glen and Oakridge joint ventures were all held by
the same financial institution. During 1990 and 1991, the ventures had
ceased to meet the debt service requirements of their mortgage loans due to
the sizable operating deficits that were being incurred. As part of a
strategic plan to seek relief from the original contractual debt service
payments and attempt to salvage some portion of the original investments,
the venture partners vigorously pursued debt restructuring negotiations for
more than four years. The direction of such negotiations changed several
times during the course of this period. Ultimately, the lender determined
that it was unwilling or unable to grant the ventures concessions of the
magnitude necessary to structure any kind of viable restructuring agreement.
Beginning in the second quarter of fiscal 1994, the negotiations with the
lender began to focus on attempting to reach an agreement whereby the
ventures would relinquish ownership of the properties in return for a
release from any further obligations to the lender. Pursuant to the terms
of certain settlement agreements dated October 7, 1993, the ventures agreed
to transfer ownership of all three properties to the lender. In addition to
a release from any further obligations to the lender, the ventures were
permitted to keep certain cash balances representing a portion of the
operating cash flow of the properties subsequent to the date that debt
service payments were suspended. The Partnership's co-venturer agreed to
split such cash balances equally with the Partnership. The Partnership
received approximately $450,000 as its share of such amounts during fiscal
1994. The ownership of the Seascape Apartments was transferred to the
lender via non-judicial foreclosure on December 30, 1993. In addition, on
December 30, 1993 the ownership of the Pacific Glen Apartments was
transferred to the lender through a bankruptcy sale and settlement.
Finally, on February 14, 1994 the ownership of the Oakridge Apartments was
transferred to the lender via a non-judicial foreclosure sale. Furthermore,
during fiscal 1994, the Partnership's interest in the Fountainhead property
was assigned to a co-venture partner (see discussion below). The property
foreclosures in fiscal 1994 and 1993 were accounted for in accordance with
Statement of Financial Accounting Standards No. 15, "Accounting by Debtors
and Creditors for Troubled Debt Restructurings" ("SFAS No. 15"). Under SFAS
No. 15, an extraordinary gain is recognized upon foreclosure equal to the
amount by which the balance of the mortgage loan and related accrued
interest exceed the estimated fair value of the investment property and
certain other net assets transferred to the lender at the time of the
foreclosure. In addition, a gain or loss on transfer of assets at
foreclosure is recognized in the amount of the difference between the net
carrying value of the operating investment property and the estimated fair
value of the operating investment property at the time of the foreclosure.
The Partnership's investments in joint ventures are accounted for on the
equity method in the Partnership's financial statements. As discussed in
Note 2, these joint ventures report their operations on a calendar year
basis. Condensed combined financial statements of these joint ventures, for
the periods indicated, follow. The condensed combined statement of
operations for calendar 1994 includes only the operations of the Fieldstone,
Grayson and Summerview joint ventures. The condensed combined statement of
operations for calendar 1993 also includes the operations of the Seascape,
Pacific Glen and Oakridge joint ventures through the dates of their
respective dispositions. The condensed combined statement of operations for
calendar 1992 also includes the operations of the Fifth Seasons joint
venture through the date of the Partnership's sale of its interest (October
20, 1992), the operations of the Windsor Park joint venture through the date
of the foreclosure (January 14, 1993) and the operations of the Forestwood
joint venture through the date of the transfer of the deed (March 5, 1993).
Due to the Partnership's policy of accounting for significant lag-period
transactions of its joint venture investees in the fiscal year in which they
occur, the condensed combined statement of operations for 1993 and 1992
include more than 12 months of operations for properties which were disposed
of during the fourth quarters of the fiscal years (Oakridge in fiscal 1994
and Windsor Park and Forestwood in fiscal 1993). The net operations of
Oakridge for calendar year 1994 and the net operations of Windsor Park and
Forestwood for calendar year 1993 included in the 1993 and 1992 condensed
summary of operations were not significant.
CONDENSED COMBINED BALANCE SHEETS
December 31, 1994 and 1993
(in thousands)
Assets
1994 1993
Current assets $ 820 $1,057
Operating investment properties, net 23,477 24,296
Other assets 1,653 1,954
$ 25,950 $27,307
Liabilities and Venturers' Deficit
Current liabilities $ 3,051 $ 3,228
Deferred interest 720 631
Notes payable to affiliates 254 254
Long-term mortgage debt, less current portion 35,364 35,365
Partnership's share of combined deficit (11,916) (10,675)
Co-venturers' share of combined deficit (1,523) (1,496)
$ 25,950 $27,307
Reconciliation of Partnership's Investment
March 31, 1995 and 1994
(in thousands)
1995 1994
Partnership's share of combined deficit
at December 31, as shown above $ (11,916) $ (10,675)
Partnership's share of ventures' liabilities 714 714
Excess basis due to investment in
ventures, net (1) - 380
Investments in joint ventures at
equity, at March 31 $ (11,202) $ (9,581)
(1)At March 31, 1994, the Partnership's investment exceeded its share of the
Combined Joint Ventures' partners' deficit accounts by $380,000. These
amounts, which related to certain expenses incurred by the Partnership in
connection with acquiring the three remaining joint venture investments,
were amortized using the straight-line method over the estimated useful
lives of the respective operating investment properties (generally 30
years). The unamortized balance of such excess basis was written off in
fiscal 1995 as a result of the planned liquidation of the remaining
investments.
CONDENSED COMBINED SUMMARY OF OPERATIONS
For the years ended December 31, 1994, 1993 and 1992
(in thousands)
1994 1993 1992
Rental revenues $ 5,146 $11,203 $15,218
Interest and other income 87 563 767
5,233 11,766 15,985
Interest expense (contractual
interest of $11,042 in 1992) 2,462 11,009 8,694
Property operating expenses 3,016 5,949 7,991
Depreciation and amortization 1,023 2,913 3,996
6,501 19,871 20,681
Operating loss (1,268) (8,105) (4,696)
Net gains on transfers of assets
at foreclosure - 5,015 2,643
Gain on transfer of interest
in unconsolidated real estate
partnership - - 261
Equity in losses from
unconsolidated real estate
partnerships (1) - - (109)
Loss before extraordinary gains (1,268) (3,090) (1,901)
Extraordinary gains on
settlement of debt obligations - 12,441 6,172
Net income (loss) $ (1,268) $ 9,351 $4,271
Net income (loss):
Partnership's share of
net income (loss) $ (1,241) $ 6,768 $4,755
Co-venturers' share of net
income (loss) (27) 2,583 (484)
$ (1,268) $ 9,351 $4,271
(1)On May 31, 1991, the Hollows II Apartments were sold to a third party for
$4,252,000. The venture which owned the apartment complex had been in
default of its mortgage debt obligation and sold the property to avoid
losing the operating property to foreclosure proceedings. The Partnership's
ownership interest in Hollows II had been substantially diluted and
subordinated in prior years as a result of required additional third-party
equity infusions. The entire amount of the net proceeds from the sale of
Hollows II was used to settle the venture's outstanding debt obligation and
to pay for transaction closing costs. As a result, none of the venture
partners received any significant proceeds from the sale transaction. In
connection with the sale, the lender agreed to take a discounted payoff of
$4,160,000 on the outstanding amount of the principal and accrued interest
owed by the venture, which aggregated approximately $6.2 million at the date
of the sale. The transaction resulted in the venture's recognition of an
extraordinary gain of approximately $1.9 million, which represented the
difference between the carrying amount of the debt obligation and the amount
paid in settlement. The Partnership's share of such gain amounted to
$1,016,000. In addition, the venture recognized a loss on the sale of the
property, in the amount of $437,000, equal to the amount by which the net
carrying value of the operating property exceeded the net sales proceeds.
The Partnership's share of the loss on sale amounted to $211,000 and is
included in the Partnership's share of ventures' losses on the accompanying
fiscal 1992 statement of operations, along with the write-off of the
unamortized balance of certain costs capitalized in connection with the
Partnership's original investment.
Reconciliation of Partnership's Share of Operations
For the years ended March 31, 1995, 1994 and 1993
(in thousands)
1995 1994 1993
Partnership's share of net
income (loss),
as shown above $ (1,241) $6,768 $4,755
Amortization of excess basis (380) (28) (25)
Partnership's share of ventures'
net income (losses) $ (1,621) $6,740 $4,730
The Partnership's share of ventures' net income (losses) for fiscal 1994,
1993 and 1992 is presented as follows on the accompanying statement of
operations:
1995 1994 1993
Partnership's share of
ventures' losses $ (1,621) $(6,079) $(3,817)
Partnership's share of net gains
on transfers of assets at foreclosure - 2,709 2,873
Partnership's share of extraordinary
gains on settlement of debt
obligations - 10,110 5,674
Partnership's share of ventures'
net income (losses) $(1,621) $ 6,740 $ 4,730
Investments in joint ventures, at equity represents the Partnership's net
investment in the joint venture partnerships. These joint ventures are
subject to partnership agreements which determine the distribution of
available funds, the disposition of the venture's assets and the rights of
the partners, regardless of the Partnership's percentage ownership interest
in the venture. Substantially all of the Partnership's investments in these
joint ventures are restricted as to distributions.
Investments in joint ventures, at equity on the balance sheet is comprised
of the following deficit investment balances (in thousands):
1995 1994
Fieldstone at Brandermill Limited
Partnership $ (4,467) $(3,995)
Grapevine I Partners, Ltd. (3,114) (2,636)
Summerview Associates, Ltd. (3,621) (2,950)
$(11,202) $(9,581)
A description of each joint venture and certain other matters are
summarized as follows:
A. Fieldstone at Brandermill Limited Partnership - Germantown, Maryland
On April 24, 1985 the Partnership acquired a 60% interest in Fieldstone
at Brandermill Limited Partnership, an existing Maryland limited partnership
which owns and operates Fieldstone at Brandermill Apartments, a 265-unit
apartment complex located in Germantown, Maryland. The aggregate investment
by the Partnership was approximately $4,436,000 (including an acquisition
fee of $261,000 paid to PWPI). The Partnership's co-venturer is an
affiliate of Corcoran and Jennison, Inc. The property is subject to a
mortgage loan, which is nonrecourse to the Partnership, in the amount of
$16,750,000, which is scheduled to mature on September 15, 1996.
Until fiscal 1993, the Fieldstone joint venture had generated sizable
operating deficits. The interest rate on the venture's debt is variable and
over the past 3 years has declined to a level which allows the property to
produce excess cash flow. Nonetheless, the fair value of the operating
property is estimated to be well below the amount of the outstanding
mortgage debt obligation. Prior deficits of the Fieldstone venture were
funded by the Partnership's co-venture partner under the optional loan
provisions of the joint venture agreement. These advances, which currently
aggregate approximately $939,000 (including accrued interest), bear interest
and are repayable as a first priority from the venture's cash flow or future
sale or refinancing proceeds. For the past 2 years, management of the
Fieldstone joint venture has had discussions with the mortgage lender
regarding a discounted prepayment of the loan, in an effort to create some
long-term value to the venture's position. Despite such efforts to
restructure the loan, the lender has been unwilling to make the necessary
debt modifications on satisfactory economic terms. Accordingly, management
did not believe that there was any significant value to the Partnership's
interest in the joint venture. In connection with the Partnership's
announced liquidation plan discussed in Note 1, management agreed to sell
the Partnership's interest in the Fieldstone joint venture to the co-venture
partner for $50,000. This transaction was completed subsequent to March 31,
1995. As a result, the Partnership no longer owns any interest in this
joint venture. The Partnership will recognize a gain of approximately $4.5
million in the first quarter of fiscal 1996 as a result of the sale of its
interest. The gain results because under the equity method of accounting
for joint venture investments, the Partnership has recognized cumulative
losses from the venture's operations (including non-cash depreciation
charges) in excess of its cash investment in the venture. The total assets,
total liabilities, gross revenues and total expenses of the Fieldstone joint
venture included in the 1994 condensed combined balance sheet and summary of
operations are $12,729,000, $17,951,000, $2,319,000 and $2,633,000,
respectively.
B. Grapevine I Partners, Ltd. - Grapevine, Texas
On October 3, 1985, the Partnership acquired a 95% interest in Grapevine
I Partners, Ltd., a Texas limited partnership which owns Grayson Square
Apartments, a 200-unit apartment complex located in Grapevine, Texas. The
aggregate investment by the Partnership was approximately $2,444,000
(including an acquisition fee of $143,750 paid to PWPI). The Partnership's
co-venture partner is an affiliate of the Trammell Crow organization. The
property was acquired subject to a nonrecourse mortgage loan in the amount
of approximately $7,750,000.
In October, 1989 the Grayson Square joint venture negotiated a
modification of its loan agreement. Unpaid accrued interest through the
date of the modification was added to the principal balance of the note and
the interest rate was reduced. In addition, closing costs were paid from
the proceeds of the modified notes. The outstanding principal balance of
this mortgage loan was approximately $8,414,000 and $8,415,000 at December
31, 1994 and 1993, respectively. In addition, deferred interest on this
debt obligation totalled approximately $720,000 and $631,000 as of December
31, 1994 and 1993, respectively. Under the terms of the modification
agreement, the joint venture was required to establish a debt service
reserve account from the proceeds of a $254,000 Refinancing Loan from the
co-venturer. The balance in the debt service reserve fund was approximately
$261,000 and $269,000 at December 31, 1994 and 1993, respectively. Interest
on the outstanding principal and deferred interest balance accrues at a
blended rate of approximately 8.5% per annum. The venture's cash flow is
not currently sufficient to fully cover this annual interest expense. As a
result, certain amounts continue to accrue and be added to the outstanding
obligation, as allowed under the terms of the debt agreement. In addition,
during calendar 1994 and 1993, the venture was forced to withdraw cash from
its debt service reserve fund to cover the required debt service payments.
The balance of the debt service reserve fund should be sufficient to allow
the venture to remain in compliance with its debt agreement for at least the
next two years. However, in the meantime, the total obligation due to the
lender will continue to grow, thereby further subordinating the venture's
equity position. Furthermore, as part of the 1989 negotiated modification
agreement, the lender received a 50% interest in future sale or refinancing
proceeds above specified levels. The debt has a scheduled maturity date of
April, 2005. The Partnership is currently negotiating with its co-venture
partner and certain third-parties to sell its interest in the joint venture
as part of the planned liquidation discussed in Note 1; however, no
agreement has been finalized to date. No significant proceeds are expected
to be realized from any sale transaction because the amount of the total
debt obligation is believed to be significantly greater than the fair market
value of the operating property. The Partnership will recognize a net gain
upon the ultimate disposition of its interest in Grayson Square due to the
negative balance of the equity method carrying value as of March 31, 1995.
The total assets, total liabilities, gross revenues and total expenses of
the Grayson Square joint venture included in the 1994 condensed combined
balance sheet and summary of operations are $6,035,000 and $9,484,000,
$1,372,000 and $1,774,000, respectively.
In October 1994, a fire occurred at the Grayson Square Apartments,
destroying most of one building. The building was insured, and the
insurance company agreed to pay all the rebuild and refit costs, excluding
the insurance policy's $5,000 deductible.
C. Summerview Associates, Ltd. - Atlanta, Georgia
On October 8, 1985 the Partnership acquired a 70% interest in Summerview
Associates, Ltd. Joint Venture, a Georgia limited partnership which owns and
operates Summerview Apartments, a 240-unit apartment complex located in
Atlanta, Georgia. The aggregate investment by the Partnership was
approximately $2,935,000 (including an acquisition fee of $175,419 paid to
PWPI). The property was acquired subject to a nonrecourse mortgage loan in
the amount of $10,200,000.
On August 1, 1989, the original loan was refunded with the proceeds from
a new $10,200,000 Collateralized Loan to Lender Housing Revenue Bond issue.
The new mortgage loan, due August 1, 2007, bears interest at a fixed rate of
6.75%, payable monthly through July 31, 1996. The original loan bore
interest of 8.75% per annum. The new bonds are subject to a mandatory
remarketing on August 1, 1996. Thereafter, the loan will accrue interest at
a rate to be determined by the remarketing agent of the new bonds (rate not
to exceed 10.2%). As a result of the refinancing, the property's cash flow
deficits have been significantly reduced. Nonetheless, the venture has
experienced recurring losses from operations and working capital
deficiencies before partner loans and projects a cash flow deficit for
calendar 1995. These conditions raise substantial doubt about the venture's
ability to continue as a going concern. The accompanying financial
statements do not include any adjustments which might result from the
outcome of this uncertainty. The Partnership is currently negotiating with
its co-venture partner to sell its interest in the joint venture as part of
the planned liquidation discussed in Note 1; however, no agreement has been
finalized to date. No significant proceeds are expected to be realized from
any sale transaction because the amount of the total debt obligation is
believed to be significantly greater than the fair market value of the
operating property. The Partnership will recognize a net gain upon the
ultimate disposition of its interest in Summerview due to the negative
balance of the equity method carrying value as of March 31, 1995. The total
assets, total liabilities, gross revenues and total expenses of the
Summerview joint venture included in the 1994 condensed combined balance
sheet and summary of operations are $7,186,000, $11,954,000, $1,542,000 and
$2,094,000, respectively.
The joint venture agreements provide, among other things, the following:
Allocation of net income and loss
The agreements generally provide that through the Guaranty Periods (see
below) or until the Partnership has been allocated losses equal to specified
amounts, 96% to 100% of losses (other than losses resulting from sales or
other disposition of the projects) will be allocated to the Partnership.
Thereafter, losses shall be allocated in varying proportions from 100% to
60% to the Partnership and from 0% to 40% to the co-venturers, as specified
in the joint venture agreements.
The agreements generally provided that income (other than gains
resulting from sales or other dispositions of the properties) was allocated
95% to 100% to the co-venturers during the Guaranty Periods to the extent of
Excess Gross Rentals and Interest Income (as defined) withdrawn or
withdrawable. Thereafter, income will be allocated in proportion to cash
distributions or if there are no distributions, from 100% to 60% to the
Partnership and from 0% to 40% to the co-venturers. Allocations of the
Partnership's operations for financial reporting purposes have been made in
conformity with the allocations of taxable income or loss.
Gains or losses resulting from sales or other dispositions of the
projects shall be allocated according to the formulas provided in the
respective joint venture agreements.
Distributions
During the Guaranty Periods, (see below) the co-venturers were entitled
to withdraw all available Excess Gross Rentals and Interest Income (as
defined in the agreements) prior to any distributions. In addition, certain
joint ventures distributed from $2,500 to $7,500 to the Partnership, as a
return of capital on an annual basis. At the end of the Guaranty Period,
the co-venturers were entitled to any Excess Gross Rentals that were
available for distribution not previously withdrawn. The Partnership and
the co-venturers agreed that during the Guaranty Period the co-venturers
could withdraw estimated Excess Gross Rentals and Interest Income with a
final computation of Excess Gross Rentals and Interest Income to be made at
the end of each Guaranty Period.
Subsequent to the Guaranty Periods, distributable funds will be
distributed first, to repay accrued interest and principal on certain loans,
second, to the Partnership until the Partnership has received cumulative
annual distributions from $2,500 to $5,000 from certain joint ventures plus
cumulative distributions of preferred equity, with the balance distributed
to the Partnership and to the co-venturers, as described in the joint
venture agreements. Distributions of net proceeds upon the sale or
disposition of the projects shall be made in accordance with formulas
provided in the joint venture agreements.
Guaranty Periods
The joint venture agreements provided that in the event that certain
expenditures exceeded certain revenues, loan proceeds and capital
contributions during the Guaranty Periods (as defined in the joint venture
agreements), the co-venturers were required to fund amounts equal to such
deficiencies.
For specified periods of time subsequent to the Guaranty Periods,
certain of the joint venture agreements required that mandatory loans be
made to the joint ventures by the co-venturers to the extent that operating
revenues were insufficient to pay operating expenses. Thereafter, optional
loans may be made by the Partnership and the co-venturers to cover such
operating deficiencies. Mandatory and optional loans shall be unsecured
and shall generally bear interest at prime plus one or two percent per
annum. The Guaranty Periods for each of the joint ventures were from the
date the Partnership entered a joint venture for a period ranging from one
to three years after the completion of construction, as defined in each of
the joint venture agreements. All guaranty and mandatory loan periods for
the joint ventures have expired. In addition, guarantees of construction
costs by the co-venturers were generally funded outside of the joint
ventures.
5. Contingencies
The Partnership is involved in certain legal actions. The Managing
General Partner believes these actions will be resolved without material
adverse effect on the Partnership's financial statements, taken as a whole.
REPORT OF INDEPENDENT AUDITORS
The Partners
Realty Southwest Fund III, Ltd.:
We have audited the accompanying combined balance sheets of the 1994 and
1993 Combined Joint Ventures of Realty Southwest Fund III, Ltd. as of December
31, 1994 and 1993 and the related combined statements of operations and changes
in venturers' deficit and cash flows for each of the three years in the period
ended December 31, 1994. Our audit also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the 1994 and 1993
Combined Joint Ventures of Realty Southwest Fund III, Ltd. at December 31, 1994
and 1993, and the combined results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole presents fairly in all material respects
the information set forth therein.
The accompanying financial statements have been prepared assuming that 1994
and 1993 Combined Joint Ventures will continue as a going concern. As more
fully described in Notes 1 and 3 to the financial statements, while the three
remaining joint ventures are operating in compliance with their mortgage debt
agreements as of December 31, 1994 and 1993, management does not believe that
there is any current value to the ventures' equity positions in the operating
investment properties above the amounts of the outstanding debt obligations. As
a result of these circumstances, Realty Southwest Fund III, Ltd. announced a
plan of liquidation during 1994. Accordingly, there is substantial doubt about
the ability of the 1994 and 1993 Combined Joint Ventures to continue as a going
concern. The accompanying financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the inability of the Combined Joint Ventures to continue as a going concern.
/S/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
February 13, 1995,
except for Note 6,
as to which the date
is April 6, 1995
1994 AND 1993 COMBINED JOINT VENTURES OF
REALTY SOUTHWEST FUND III, LTD.
COMBINED BALANCE SHEETS
December 31, 1994 and 1993
(In Thousands)
Assets
1994 1993
Current assets:
Cash and cash equivalents, including
restricted funds for tenant security
deposits of $81 and $106 $ 369 $ 515
Accounts receivable 29 25
Accounts receivable from and advances
to affiliates 51 56
Prepaid expenses 195 212
Real estate tax and mortgage escrows 176 248
Total current assets 820 1,056
Operating investment properties:
Land 4,553 4,553
Buildings, improvements and equipment 29,728 29,568
34,281 34,121
Less accumulated depreciation (10,804) (9,825)
23,477 24,296
Debt service reserve 261 269
Escrow funds 750 750
Deferred expenses, net of accumulated
amortization of $3,064 in 1994 and $2,770 in 1993 631 925
Other assets 11 11
$25,950 $ 27,307
Liabilities and Venturers' Deficit
Current liabilities:
Accounts payable and accrued liabilities $ 269 $ 184
Accounts payable - affiliates 136 141
Accrued interest 1,053 868
Loans payable to affiliates 1,505 1,925
Tenant security deposits 88 110
Total current liabilities 3,051 3,228
Deferred interest 720 631
Note payable to affiliate 254 254
Long-term debt 35,364 35,365
Venturers' deficit (13,439) (12,171)
$25,950 $ 27,307
See accompanying notes.
1994 AND 1993 COMBINED JOINT VENTURES OF
REALTY SOUTHWEST FUND III, LTD.
COMBINED STATEMENTS OF OPERATIONS AND
CHANGES IN VENTURERS' DEFICIT
For the years ended December 31, 1994 and 1993
(In Thousands)
1994 1993
REVENUES:
Rental revenues $ 5,146 $ 5,124
Interest and other income 87 79
5,233 5,203
EXPENSES:
Interest 2,462 2,181
Depreciation and amortization 1,023 1,414
Real estate taxes 525 580
Operating expenses 554 516
Advertising 86 83
General and administrative 336 324
Repairs and maintenance 601 565
Management fees 258 253
Salaries and related costs 328 325
Other operating expenses 328 332
6,501 6,573
NET LOSS (1,268) (1,370)
Venturers' deficit, beginning of year (12,171) (10,801)
Venturers' deficit, end of year $(13,439) $(12,171)
See accompanying notes.
1994 AND 1993 COMBINED JOINT VENTURES OF
REALTY SOUTHWEST FUND III, LTD.
COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1994 and 1993
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
1994 1993
Cash flows from operating activities:
Net loss $ (1,268) $ (1,370)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,023 1,414
Amortization of deferred financing costs 250 -
Deferred interest 89 131
Changes in assets and liabilities:
Accounts receivable (4) 9
Accounts receivable from and advances to
affiliates 5 (2)
Prepaid expenses 17 (22)
Real estate tax and mortgage escrows 72 36
Accounts payable and accrued liabilities 85 2
Accounts payable - affiliates (5) 4
Accrued interest 185 166
Tenant security deposits (22) (1)
Total adjustments 1,695 1,737
Net cash provided by operating activities 427 367
Cash flows from investing activities:
Additions to operating investment properties (160) (75)
Cash flows from financing activities:
Payments on loans payable to affiliates (420) (110)
Payments from debt service reserve 8 35
Payments on long-term debt (1) -
Net cash used for financing activities (413) (75)
Net (decrease) increase in cash and cash equivalents (146) 217
Cash and cash equivalents, beginning of year 515 298
Cash and cash equivalents, end of year $ 369 $ 515
Cash paid during the year for interest $ 1,786 $ 1,756
See accompanying notes.
1. Organization and Planned Liquidation
The accompanying combined financial statements of the 1994 Combined Joint
Ventures of Realty Southwest Fund III, Ltd. (1994 Combined Joint Ventures) as
of December 31, 1994 and 1993 include all of the joint venture investments of
Realty Southwest Fund III, Ltd. ("RSWIII") as of March 31, 1995 and 1994
(RSWIII's fiscal year-end). RSWIII reports the operations of the joint
ventures on a 3-month lag. RSWIII originally acquired a 60% - 95% interest
in the 1994 Combined Joint Ventures on the dates indicated below:
% Date of Acquisition
Joint Ventures Acquired of RSWIII's Interest
Fieldstone 60% April 24, 1985
Grapevine 95% October 3, 1985
Summerview 70% October 8, 1985
While the remaining investments are currently operating in compliance with
their mortgage debt agreements, management of RSWIII does not believe that
there is any current value to RSWIII's position in these properties above the
amounts of the outstanding debt obligations. In addition, certain of the
remaining operating properties are generating cash deficits after scheduled
debt service payments. As a result of these conditions, the ability of the
remaining joint ventures to continue their operations and realize their
assets is dependent upon future events, including their obtaining sufficient
working capital to finance continuance of their operations, obtaining
additional funds to finance their other liabilities, the continued financial
support of their partners and the modification of their debt agreements. The
eventual outcome of these matters cannot be determined at this time. As a
result of these circumstances, in October 1994 the Managing General Partner
of RSWIII announced plans to complete a liquidation of the Partnership. As
part of RSWIII's liquidation, its three remaining investment interests will
be sold or assigned, most likely only for nominal amounts (see Note 6). The
formal liquidation of the Partnership is expected to be completed by the end
of calendar 1995. These conditions raise substantial doubt about the ability
of the 1994 and 1993 Combined Joint Ventures to continue as a going concern.
The accompanying financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
2.Summary of Significant Accounting Policies
Basis of Presentation
The financial statements of the 1994 and 1993 Combined Joint Ventures are
presented in combined form due to the ownership relationship between each of
the joint ventures and RSWIII. The financial statements of the 1994 and
1993 Combined Joint Ventures have been prepared based on the periods that
RSWIII has held an interest in the individual joint ventures.
Operating investment properties
The operating investment properties are carried at the lower of cost,
adjusted for certain guaranteed payments from affiliates and accumulated
depreciation, or net realizable value. The net realizable value of a
property held for long-term investment purposes is measured by the
recoverability of the investment through expected future cash flows on an
undiscounted basis, which may exceed the property's current market value.
The net realizable value of a property held for sale approximates its market
value. All of the operating investment properties owned by the 1994 and 1993
Combined Joint Ventures are carried at cost, less accumulated depreciation,
because any sale, foreclosure or other disposition of the remaining operating
investment properties will result in net gains to be recognized by the
ventures. Due to the planned liquidation of RSWIII as discussed in Note 1,
such gains are expected to be recognized in 1995.
The 1994 and 1993 Combined Joint Ventures have capitalized interest and
property taxes incurred during the construction period of the projects along
with the costs of identifiable improvements. Professional fees, including
guarantee fees, have been capitalized and are included in the cost of
buildings and improvements. Depreciation expense is computed on a straight-
line basis over the estimated useful lives of the buildings, improvements and
equipment, generally five to thirty years.
Deferred expenses
Deferred expenses consist primarily of organization costs and management
fees which have been amortized over five years, and loan fees which are being
amortized over the terms of the related loans. Amortization of loan fees is
included in interest expense on the accompanying statements of operations.
Cash and cash equivalents
For purposes of the statement of cash flows, the 1994 and 1993 Combined
Joint Ventures consider all highly liquid investments with original maturities
of 90 days or less, to be cash equivalents.
Real estate tax and mortgage escrows
Real estate tax and mortgage escrows on the accompanying balance sheet
consist primarily of amounts reserved for the payment of real estate taxes and
insurance per the terms of the ventures' mortgage loan agreements.
Income taxes
No provision for income taxes has been made in the combined financial
statements of the 1994 and 1993 Combined Joint Ventures since taxable income
or tax losses of the joint ventures are included on the tax returns of the
individual partners.
3. The Joint Ventures
See Note 4 to the financial statements of RSWIII included in this Annual
Report for a more detailed discussion of the joint venture partnerships.
Descriptions of the ventures' properties are summarized below:
A. Fieldstone at Brandermill Limited Partnership
The joint venture owns and operates Fieldstone at Brandermill
Apartments, a 265-unit apartment complex located in Germantown,
Maryland. Until 1993, the Fieldstone joint venture had generated
sizable operating deficits. As described in Note 5, the interest rate
on the venture's debt is variable and has declined to a level which
allows the property to produce a small amount of excess cash flow.
Prior deficits of the Fieldstone venture were funded by the co-venture
partner under the optional loan provisions of the joint venture
agreement. These advances, which aggregated approximately $939,000
(including accrued interest) at December 31, 1994, bear interest and are
repayable as a first priority from the venture's cash flow or future
sale or refinancing proceeds. Management of the Fieldstone joint
venture has had preliminary discussions with the mortgage lender
regarding a discounted prepayment of the loan, which could create some
long-term value to the venture's position. Despite every effort to
restructure the loan, the lender has been unwilling to make the
necessary debt modifications on satisfactory economic terms. The total
assets, total liabilities, gross revenues and total expenses of the
Fieldstone at Brandermill Limited Partnership included in the 1994
balance sheet and statement of operations are $12,729,000, $17,951,000,
$2,319,000 and $2,633,000, respectively.
B. Grapevine I Partners, Ltd.
The joint venture owns and operates Grayson Square Apartments, a 200-
unit apartment complex located in Grapevine, Texas. The venture's cash
flow is not currently sufficient to fully cover the annual interest
expense on its outstanding long-term debt (see Note 5). As a result,
certain amounts continue to accrue and be added to the outstanding
obligation, as allowed under the terms of the debt agreement. In
addition, during 1994 and 1993 the venture was forced to withdraw cash
from its debt service reserve fund to cover the required debt service
payments. The balance of the debt service reserve fund should be
sufficient to allow the venture to remain in compliance with its debt
agreement for at least the next two years. However, in the meantime,
the total obligation due to the lender will continue to grow, thereby
further subordinating the venture's equity position. Furthermore, as
part of the 1989 negotiated modification agreement, the lender received
a 50% interest in future sale or refinancing proceeds above specified
levels. The debt has a scheduled maturity date of April, 2005. As part
of RSWIII's planned liquidation, RSWIII is negotiating with its co-
venture partner and certain third-parties to sell its interest in the
joint venture for a nominal amount. To date, no agreement has been
finalized. The total assets, total liabilities, gross revenues and
total expenses of the Grapevine I Partners, Ltd. included in the
accompanying 1994 balance sheet and statement of operations are
$6,035,000, $9,484,000, $1,372,000 and $1,773,000, respectively.
In October 1994, a fire occurred at the Grayson Square Apartments,
destroying most of one building. The building was insured, and the
insurance company agreed to pay all of the rebuild and refit costs,
excluding the insurance policy's $5,000 deductible.
C. Summerview Associates, Ltd.
The joint venture owns and operates Summerview Apartments, a 240-unit
apartment complex located in Atlanta, Georgia. The joint venture has
experienced recurring losses from operations and working capital
deficiencies before partner loans and projects a negative cash flow for
1995. Such cash flow deficiency would likely need to be funded by the
venture partners in order to avoid a default on the venture's debt
obligation. As part of RSWIII's planned liquidation, RSWIII is
negotiating with its co-venture partner to purchase its interest in the
joint venture for $25,000; however, no agreement has been finalized to
date. If this transaction cannot be consummated, the venture may allow
the title to the property to transfer to the lender through a non-
judicial foreclosure proceeding. The total assets, total liabilities,
gross revenues and total expenses of Summerview Associates, Ltd.
included in the accompanying 1994 balance sheet and statement of
operations are $7,186,000, $11,954,000, $1,542,000 and $2,094,000,
respectively.
The following description of the joint venture agreements provides certain
general information.
Allocation of net income and loss
The joint venture agreements generally provide that through the Guaranty
Periods (see below) or until RSWIII has been allocated losses equal to
specified amounts, 96% to 100% of losses (other than losses resulting from
sales or other disposition of the projects) will be allocated to RSWIII.
Thereafter, losses shall be allocated in varying proportions from 100% to 60%
to RSWIII and from 0% to 40% to the co-venturers, as specified in the joint
venture agreements.
The joint venture agreements generally provided that income (other than
gains resulting from sales or other dispositions of the properties) was
allocated 95%-100% to the co-venturers during the Guaranty Periods to the
extent of Excess Gross Rentals and Interest Income (as defined) withdrawn or
withdrawable. Thereafter, income will be allocated in proportion to cash
distributions or if there are no distributions from 100% to 60% to RSWIII and
from 0% to 40% to the co-venturers. Allocations of the Partnership's
operations for financial reporting purposes have been made in conformity with
the allocations of taxable income or tax loss.
Gains or losses resulting from sales or other dispositions of the projects
shall be allocated according to the formulas provided in the joint venture
agreements.
Distributions
During the Guaranty Periods, (see below) the co-venturers were entitled to
withdraw all available Excess Gross Rentals and Interest Income prior to any
distributions (as defined in the joint venture agreements). In addition,
RSWIII was to be distributed from $2,500 to $7,500 from certain joint
ventures, as a return of capital on an annual basis. At the end of the
Guaranty Period, the co-venturers were entitled to any Excess Gross Rentals
that were available for distribution not previously withdrawn. The
Partnership and the co-venturers agreed that during the Guaranty Period the
co-venturers could withdraw estimated Excess Gross Rentals and Interest Income
with a final computation of Excess Gross Rentals and Interest Income to be
made at the end of each Guaranty Period.
Subsequent to the Guaranty Periods, distributable funds will be distributed
first, to repay accrued interest and principal on certain loans, second, to
RSWIII until RSWIII has received cumulative annual distributions from $2,500
to $5,000 from certain joint ventures plus cumulative distributions of
preferred equity, with the balance distributed to RSWIII and to the co-
venturers, as described in the joint venture agreements.
Distributions of net proceeds upon the sale or disposition of the projects
shall be made in accordance with formulas provided in the joint venture
agreements.
Guaranty Periods
The joint venture agreements provided that in the event that certain
expenditures exceed certain revenues, loan proceeds and capital contributions
during the Guaranty Periods (as defined in the joint venture agreements), the
co-venturers were required to fund amounts equal to the deficiencies.
For specified periods of time subsequent to the Guaranty Periods, certain
of the joint venture agreements required that mandatory loans be made to the
joint ventures to the extent that operating revenues were insufficient to pay
operating expenses. Thereafter, optional loans may be made by RSWIII and the
co-venturers to the joint ventures to cover such operating deficiencies. The
mandatory and optional loans shall be unsecured and shall generally bear
interest at prime plus one or two percent per annum.
The Guaranty Periods for each of the joint ventures were from the date
RSWIII entered a joint venture for a period ranging from one to three years
after the completion of construction, as defined in the joint venture
agreements. Guaranty and mandatory loan periods for all of the joint ventures
have expired. In addition, guarantees of construction costs by the co-
venturers were generally funded outside of the joint ventures.
4. Related Party Transactions
The 1994 and 1993 Combined Joint Ventures have entered into property and
partnership management agreements whereby the co-venturers and certain of
their affiliates are entitled to receive fees in connection with the
management of the investment properties. The property management fees are set
rates between 3.5% and 5% of gross revenues, as defined.
Certain of the joint ventures and co-venturers use a centralized cash
management system operated by an affiliated entity. Under this system,
substantially all of the joint ventures' receipts are deposited directly to
the affiliated entity's bank account and substantially all of the joint
ventures' operating expenses and other disbursements are paid from this
central bank account. These receipts and payments are accounted for as
accounts receivable from and advances to affiliates.
Pursuant to the guaranty and mandatory loan periods for the joint ventures,
the co-venturers of the joint ventures were required to fund operating
deficits. Thereafter, optional loans may be made by the Partnership and the
co-venturers at their discretion. At December 31, 1994, outstanding mandatory
and optional loans payable to the venture partners totalled approximately
$1,759,000. These loans generally bear interest at prime plus 1%-2% and are
payable from distributable funds, as defined.
5. Mortgage notes payable
Mortgage notes payable at December 31, 1994 and 1993 consists of the
following (in thousands):
1994 1993
Nonrecourse mortgage note secured by the
Summerview apartment property due August
1, 2007. Monthly payments of interest
only are due at 6.75% through July, 1996.
Thereafter at a rate to be determined by
the remarketing agent of the bonds. $ 10,200 $10,200
Mortgage note secured by the Fieldstone
at Brandermill apartment property.
Interest on the note is at a variable
rate (with an 8% maximum through 1994) as
borne by the Bonds, determined weekly.
The average interest rate paid during
1994 was 3.1% (2.9% in 1993). Interest
only is payable monthly with all
principal payments to be made upon the
expiration of the letter of credit on
September 15, 1996, or, if extended, no
later than August 24, 2007. 16,750 16,750
Nonrecourse mortgage notes secured by
the Grayson Square apartment property
and all revenues derived therefrom. Debt
has been modified with an effective
interest rate of approximately 8.5%
through March 1996. Interest only is
payable and due monthly through
November, 1994, and thereafter monthly
installments of principal and interest
are due through April, 2005. (See
discussion
of modification below.) 8,414 8,415
$35,364 $ 35,365
All of the above mortgage loans have been provided through the issuance of
Multi-Family Housing Revenue Bonds. Generally, the interest on the
underlying bonds is intended to be exempt from Federal income tax pursuant to
Section 103 of the Internal Revenue Code. Substantially all of the proceeds
of the bonds are to be utilized to finance multi-family housing of which 20%
or more of the units are to be leased to low and moderate income families as
defined by the United States Department of Housing and Urban Development.
In addition to being secured by the respective venture's operating
investment properties, the loans are generally secured by a bank letter of
credit equal to the principal amount of the underlying bonds plus an amount
of accrued interest. The letter of credit provides security to underlying
bondholders in the event of a default on the mortgage loan by the venture.
The ventures generally pay the issuers of the letter of credit annual fees
ranging from 1.25% to 1.50% of the letter of credit amount.
At specified dates, as defined by the bond indenture, the Partnership may
elect to prepay the mortgage loans in order to effect the redemption of
bonds. The prepayment prices ranges from 100% to 106% of the outstanding
balance. The notes are subject to mandatory prepayment if the bonds are
required to be redeemed as a result of loss of tax exempt status, failure of
the bonds to be remarketed, or certain other events specified in the bond
indentures.
The aggregate minimum maturities of mortgage notes payable for each of the
next five years and thereafter are as follows (in thousands)
1995 $ 82
1996 27,038
1997 95
1998 102
1999 109
Thereafter 7,938
$35,364
Long-term debt of the Fieldstone at Brandermill joint venture consists of
a $16,000,000 promissory note payable to the Housing Opportunities Commission
of Montgomery County dated September 20, 1984. The proceeds for the loan
came from the issuance of $16,750,000 of Housing Revenue Bonds (Fieldstone at
Brandermill), 1984 Issue I, by the Housing Opportunities Commission of
Montgomery County. The $750,000 difference between the bonds and the
promissory note is being held by a trustee on behalf of the joint venture
and, accordingly, is included in both long-term debt and escrowed funds in
the accompanying balance sheet. Interest earned on these funds are netted
against mortgage interest expense and amounted to approximately $47,000 and
$46,000 in 1994 and 1993, respectively. Principal and interest payments on
the bonds are secured first by an irrevocable letter of credit issued by a
bank in the amount of $16,263,014 and a $16,000,000 surety bond. The joint
venture pays an annual letter of credit fee equal to 1.5% of the above letter
of credit amount and an annual fee of $40,000 for the surety bond.
In October, 1989 the Grayson Square joint venture negotiated a modification
of its loan agreement. Unpaid accrued interest through the date of the
modification was added to the principal balance of the notes and the interest
rate was reduced. In addition, closing costs were paid from the proceeds of
the modified notes. Under the terms of the modification agreement, the joint
venture was required to establish a debt service reserve account, an
operating income account, and a replacement reserve account. The debt
service reserve account was established during 1989 in the form of a $254,000
Refinancing Loan from the co-venturer. The loan from the co-venturer is
noninterest bearing. The operating income account, as defined, was
established via the venture's monthly net operating income payments, as
defined. These funds are held in a mortgage escrow deposit account for the
payment of certain operating expenses. The replacement reserve account was
established, pursuant to the modification agreement, with the excess of funds
in the operating income account after making the required payments for the
operating expenses as specified in the agreement. The modification agreement
requires certain payments into these accounts and restricts payments out of
these accounts. Amounts in the replacement reserve account and debt service
reserve account are included in the debt service reserve total on the
accompanying balance sheets. As part of the negotiated modification
agreement, the lender received a 50% interest in future sale or refinancing
proceeds above specified levels.
6. Subsequent Event
On April 6, 1995, RSWIII agreed to sell its interest in the Fieldstone
joint venture to its co-venture partner for a cash payment of $50,000.
Schedule III - Combined Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>
1994 AND 1993 COMBINED JOINT VENTURES OF REALTY SOUTHWEST FUND III, LTD.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1994
(in thousands)
Costs
Capitalized Life on Which
Initial Cost to (Removed) Depreciation
Combined Joint Subsequent to Gross Amount at Which Carried at in Latest
Ventures Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
Combined Joint Ventures:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Complex;
Germantown,
MD $16,750 $2,358 $6,847 $6,846 $2,358 $13,693 $16,051 $ 5,002 1986 4/24/85 5 - 30 yrs
Apartment
Complex;
Grapevine,
TX 8,414 1,128 - 6,283 1,128 6,283 7,411 1,971 1986 10/3/85 5 - 30 yrs
Apartment
Complex;
Atlanta,
GA 10,200 1,118 10,384 (683) 1,067 9,752 10,819 3,831 1985 10/8/85 5 - 30 yrs
$35,364 $ 4,604 $17,231 $12,446 $ 4,553 $29,728 $34,281 $10,804
Notes
(A) The aggregate cost of real estate owned at December 31, 1994 for Federal income tax purposes is approximately $33,883,000.
(B) See Note 5 to Combined Financial Statements for a description of the debt encumbering these properties.
(C) Reconciliation of real estate owned:
1994 1993
Balance at beginning of year $34,121 $ 34,046
Costs capitalized subsequent to
acquisition 160 75
Balance at end of year $34,281 $ 34,121
(D) Reconciliation of accumulated depreciation:
Balance at beginning of year $ 9,825 $ 8,704
Depreciation expense 979 1,121
Balance at end of year $10,804 $ 9,825
</TABLE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Realty Southwest Fund III, Ltd.:
We have audited the accompanying combined balance sheets of the 1992
Combined Joint Ventures of Realty Southwest Fund III, Ltd. as of December 31,
1992, and the related combined statements of operations and changes in
venturers' deficit and cash flows for the year then ended. Our audit also
included the financial statements schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the 1992 Combined
Joint Ventures of Realty Southwest Fund III, Ltd. at December 31, 1992 and the
combined results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole presents fairly in all
material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the
1992 Combined Joint Ventures will continue as a going concern. As more fully
described in Notes 1, 3, 4, 6, and 7 to the financial statements, the 1992
Combined Joint Ventures have incurred recurring losses from operations and have
working capital and capital deficiencies. In addition, certain of the joint
ventures are in default on their mortgage loans. These conditions raise
substantial doubt about the 1992 Combined Joint Ventures' ability to continue as
a going concern. Other than the classification of the liabilities of one of the
1992 Combined Joint Ventures as being subject to compromise, the accompanying
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
February 25, 1993
1992 COMBINED JOINT VENTURES OF
REALTY SOUTHWEST FUND III, LTD.
COMBINED BALANCE SHEET
December 31, 1992
(in thousands)
Assets
1992
Current assets:
Cash and cash equivalents, including restricted
funds for tenant security deposits of $105 $ 5,072
Investments in U. S. Government obligations 1,622
Accounts receivable 35
Accounts receivable from and advances to affiliates 2,436
Prepaid expenses 191
Real estate tax and mortgage escrows 284
Total current assets 9,640
Operating investment properties:
Land 13,155
Buildings, improvements and equipment 63,865
77,020
Less accumulated depreciation (17,027)
59,993
Debt service reserve 304
Escrow funds 750
Deferred expenses, net of accumulated
amortization of $4,952 2,463
Other assets 146
$ 73,296
Liabilities and Venturers' Deficit
Liabilities subject to compromise:
Mortgage note payable $ 17,000
Accrued interest 3,528
Loans payable to co-venturers 749
21,277
Current liabilities:
Accounts payable and accrued liabilities 430
Accounts payable - affiliates 169
Tenant security deposits 276
Loans payable to affiliates 2,431
Accrued interest 9,272
Mortgage debt in default 25,000
Total current liabilities 37,578
Deferred interest 1,416
Equity in losses of unconsolidated real estate
partnership in excess of investments and advances 437
Notes payable to affiliates 1,299
Long-term debt 35,365
Venturers' deficit (24,076)
$ 73,296
See accompanying notes.
1992 COMBINED JOINT VENTURES OF
REALTY SOUTHWEST FUND III, LTD.
COMBINED STATEMENT OF OPERATIONS AND
CHANGES IN VENTURERS' DEFICIT
For the year ended December 31, 1992
(in thousands)
1992
REVENUES:
Rental revenues $10,876
Interest and other income 565
11,441
EXPENSES:
Interest (contractual interest $7,957) 5,609
Depreciation and amortization 3,155
Real estate taxes 1,064
Operating expenses 796
Advertising 175
General and administrative 616
Repairs and maintenance 1,014
Management fees 529
Salaries and related costs 781
Other operating expenses 514
14,253
Operating loss (2,812)
Equity in losses from unconsolidated real
estate partnership (109)
Gain on transfer of interest in
unconsolidated real estate partnership 262
NET LOSS (2,659)
Contributions from venturers 65
Distributions to venturers -
Venturers' deficit, beginning of year (21,482)
Venturers' deficit, end of year $(24,076)
See accompanying notes.
1992 COMBINED JOINT VENTURES OF
REALTY SOUTHWEST FUND III, LTD.
COMBINED STATEMENT OF CASH FLOWS
For the year ended December 31, 1992
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
1992
Cash flows from operating activities:
Net loss $ (2,659)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 3,155
Gain on transfer of interest in
unconsolidated real estate partnership (262)
Equity in losses from unconsolidated real
estate partnership 109
Deferred interest 79
Changes in assets and liabilities:
Accounts receivable 4
Accounts receivable from and advances
to affiliates (377)
Prepaid expenses 52
Real estate tax and mortgage escrows 112
Other assets 115
Accounts payable and accrued liabilities 33
Accounts payable - affiliates (253)
Accrued interest 3,611
Tenant security deposits (45)
Total adjustments 6,333
Net cash provided by operating activities 3,674
Cash flows from investing activities:
Additions to operating investment properties (206)
Cash flows from financing activities:
Proceeds from loans payable to affiliates 265
Net additions to debt service reserve (120)
Net cash provided by financing activities 145
Net increase in cash and cash equivalents 3,613
Cash and cash equivalents, beginning of year 1,459
Cash and cash equivalents, end of year $ 5,072
Cash paid during the year for interest $ 1,909
See accompanying notes.
1. Organization
The accompanying combined financial statements of the 1992 Combined Joint
Ventures of Realty Southwest Fund III, Ltd. (1992 Combined Joint Ventures) as
of December 31, 1992 include all of the joint venture investments of Realty
Southwest Fund III, Ltd. ("RSWIII") as of March 31, 1993 (RSWIII's fiscal
year-end). RSWIII reports the operations of the joint ventures on a 3-month
lag. RSWIII originally acquired a 60% - 95% interest in the 1992 Combined
Joint Ventures on the dates indicated below:
% Date of Acquisition
Joint Ventures Acquired of RSWIII's Interest
Fieldstone 60% April 24, 1985
Oakridge 70% April 30, 1985
Pacific Glen 70% May 7, 1985
Seascape 70% May 30, 1985
Fountainhead 70% May 31, 1985
Grapevine 95% October 3, 1985
Summerview 70% October 8, 1985
As further discussed in Note 4, certain changes in the ownership of the
Fountainhead joint venture have occurred through December 31, 1992, as a
result of a required restructuring of the joint venture ownership necessary to
provide for the funding of cash flow deficits and debt refinancing expenses.
As discussed further in Notes 3, 6 and 7, three of the 1992 Combined Joint
Ventures were in violation of their loan agreements at December 31, 1992. In
addition, certain of the remaining operating properties are generating cash
flow deficits after scheduled debt service payments. As a result of these
circumstances, the ability of the 1992 Combined Joint Ventures to continue
their operations is dependent upon successful modification of those mortgage
loans that are currently in default, additional relief from debt service
requirements, improved property performance and continued financial support
from the venture partners.
2. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements of the 1992 Combined Joint Ventures are presented
in combined form due to the ownership relationship between each of the joint
ventures and RSWIII. Transactions between the joint ventures and certain
related limited partnerships have been eliminated. The financial statements
of the 1992 Combined Joint Ventures have been prepared based on the periods
that RSWIII has held an interest in the individual joint ventures.
Liabilities subject to compromise represent the combined liabilities of
Joint Ventures for which a bankruptcy petition has been filed in an attempt to
prevent a judicial foreclosure by the mortgage lender.
Mortgage debt in default includes debt that is in technical default and
where the lender has initiated foreclosure action but management is continuing
to operate the property and is attempting to refinance or modify the debt
obligation. It is possible that certain of the properties subject to such
default will be lost to foreclosure. If any of the operating investment
properties owned by the 1992 Combined Joint Ventures were foreclosed upon by
the lender, the respective joint venture would recognize a net gain on
foreclosure equal to the excess of liabilities over assets at the time of the
foreclosure.
Operating investment properties
The operating investment properties are carried at the lower of cost,
adjusted for certain guaranteed payments from affiliates and accumulated
depreciation, or net realizable value. The net realizable value of a property
held for long-term investment purposes is measured by the recoverability of
the investment (net of nonrecourse debt obligations) through expected future
cash flows on an undiscounted basis, which may exceed the property's current
market value. The net realizable value of a property held for sale
approximates its current market value. At December 31, 1992, all of the
operating investment properties owned by the 1992 Combined Joint Ventures are
carried at cost, less accumulated depreciation, because the carrying value of
the investments (net of nonrecourse debt obligations) was below zero in all
cases.
The 1992 Combined Joint Ventures have capitalized interest and property
taxes incurred during the construction period of the projects along with the
costs of identifiable improvements. Professional fees, including guarantee
fees, have been capitalized and are included in the cost of buildings and
improvements. Depreciation expense is computed on a straight-line basis over
the estimated useful lives of the buildings, improvements and equipment,
generally five to thirty years.
Deferred expenses
Deferred expenses consist primarily of organization costs and management
fees which have been amortized over five years, and loan fees which are being
amortized over the terms of the related loans.
Cash and cash equivalents
For purposes of the statement of cash flows, the 1992 Combined Joint
Ventures consider all highly liquid investments with original maturities of 90
days or less to be cash equivalents.
U. S. Government Obligations
Investments in U. S. Government obligations are carried at cost, which
approximates market value, at December 31, 1992.
Income taxes
No provision for income taxes has been made in the combined financial
statements of the 1992 Combined Joint Ventures since taxable income or tax
losses of the joint ventures are included on the tax returns of the individual
partners.
Investment in unconsolidated real estate partnership
The investment in Equity-Fountainhead I Venture was not consolidated due to
the significant change in control of this partnership during 1987 (see Note
4). This investment has been accounted for under the equity method. Under
the equity method, an investment is carried at cost adjusted for the 1992
Combined Joint Ventures' share of the partnership's earnings and losses and
distributions (see Note 4).
3. The Joint Ventures
See Note 4 to the financial statements of RSWIII included in this Annual
Report for a more detailed discussion of the joint venture partnerships.
Descriptions of the ventures' properties are summarized below.
A. Fieldstone at Brandermill Limited Partnership
The joint venture owns and operates Fieldstone at Brandermill
Apartments, a 265-unit apartment complex located in Germantown,
Maryland. The joint venture has experienced recurring net losses, has a
working capital deficiency as of December 31, 1992, expects similar
deficiencies in the next year, and requires partner advances to continue
to operate. There are no assurances that such advances will be made
(see Note 7). Such conditions raise substantial doubt about the ability
of the venture to continue as a going concern. The accompanying
financial statements do not include any adjustments that may result from
the outcome of this uncertainty. The total assets, total liabilities,
gross revenues and total expenses of Fieldstone at Brandermill Limited
Partnership included in the accompanying 1992 balance sheet and
statement of operations are $13,820,000, $18,379,000, $2,251,000 and
$2,778,000, respectively.
B. Lincoln Westlake Associates Joint Venture
The joint venture owns and operates Oakridge Apartments, a 178-unit
apartment complex located in Agoura Hills, California. At December 31,
1992, the venture was in default of its mortgage loan agreement and was
subject to foreclosure proceedings (see Note 7). The property is
presently being managed by a court-appointed Receiver. Such conditions
raise substantial doubt about the ability of the venture to continue as
a going concern. The accompanying financial statements do not include
any adjustments that may result from the outcome of this uncertainty.
The total assets, total liabilities, gross revenues and total expenses
of Lincoln Westlake Associates Joint Venture included in the
accompanying 1992 balance sheet and statement of operations are
$13,277,000, $16,344,000, $1,838,000 and $2,854,000, respectively.
C. Lincoln L. A. Associates Joint Venture
The joint venture owns and operates Pacific Glen Apartments, a 320-unit
apartment complex located in Azusa, California. During 1991, the joint
venture filed a Voluntary Petition for Chapter 11 Bankruptcy in the
United States Bankruptcy Court of California in order to prevent an
immediate foreclosure action by the mortgage lender. The property is
presently being managed by a court-appointed Receiver. The eventual
outcome of the bankruptcy proceedings cannot be determined at this time
(see Note 7). Such conditions raise substantial doubt about the ability
of the venture to continue as a going concern. The accompanying
financial statements do not include any adjustments that may result from
the outcome of this uncertainty. The total assets, total liabilities,
gross revenues and total expenses of Lincoln L.A. Associates Joint
Venture included in the accompanying 1992 balance sheet and statement of
operations are $17,799,000, $21,663,000, $2,746,000 and $1,570,000,
respectively.
D. Lincoln Carlsbad Associates Joint Venture
The joint venture owns and operates the Seascape Apartments, a 208-unit
apartment complex located in Carlsbad, California. At December 31,
1992, the venture was in default of its mortgage loan agreement and was
subject to foreclosure proceedings (see Note 7). The property is
presently being managed by a court-appointed Receiver. Such conditions
raise substantial doubt about the ability of the venture to continue as
a going concern. The accompanying financial statements do not include
any adjustments that may result from the outcome of this uncertainty.
The total assets, total liabilities, gross revenues and total expenses
of Lincoln Carlsbad Associates Joint Venture included in the
accompanying 1992 balance sheet and statement of operations are
$13,669,000, $19,536,000, $1,793,000 and $3,306,000, respectively.
E. Fountainhead I Joint Venture
The joint venture owns an interest in Fountainhead Apartments, Phase I,
a 240-unit apartment complex located in San Antonio, Texas, through
Fountainhead I, Ltd. As discussed in Note 4, in 1987 Fountainhead I,
Ltd. transferred ownership of the apartments to Equity-Fountainhead I
Venture in return for a reduced and subordinated interest in the
operating property. Also, as discussed in Note 4, Fountainhead I, Ltd.
has elected not to participate in the cash calls by Equity-Fountainhead
I Venture required to fund the cash flow deficits and debt refinancing
expenses of the operating property since 1987, resulting in a further
dilution of Fountainhead I, Ltd.'s ownership in Equity-Fountainhead I.
F. Grapevine I Partners, Ltd.
The joint venture owns and operates Grayson Square Apartments, a 200-
unit apartment complex located in Grapevine, Texas.
G. Summerview Apartments Joint Venture
The joint venture owns and operates Summerview Apartments, a 240-unit
apartment complex located in Atlanta, Georgia. The joint venture has
experienced recurring losses from operations and working capital
deficiencies (before partner loans). Management of the venture projects
positive cash flow in 1993, however, it assumes both increases in
revenues and decreases in operating expenses which may not be achievable
(see Note 7). Such conditions raise substantial doubt about the ability
of the venture to continue as a going concern. The accompanying
financial statements do not include any adjustments that may result from
the outcome of this uncertainty. The total assets, total liabilities,
gross revenues and total expenses of Summerview Apartments Joint Venture
included in the accompanying 1992 balance sheet and statement of
operations are $8,053,000, $11,666,000, $1,512,000 and $2,098,000,
respectively.
The following description of the joint venture agreements provides certain
general information.
Allocation of net income and loss
The joint venture agreements generally provide that through the Guaranty
Periods (see below) or until RSWIII has been allocated losses equal to
specified amounts, 96% to 100% of losses (other than losses resulting from
sales or other disposition of the projects) will be allocated to RSWIII.
Thereafter, losses shall be allocated in varying proportions from 100% to 60%
to RSWIII and from 0% to 40% to the co-venturers, as specified in the joint
venture agreements.
The joint venture agreements generally provided that income (other than
gains resulting from sales or other dispositions of the properties) was
allocated 95%-100% to the co-venturers during the Guaranty Periods to the
extent of Excess Gross Rentals and Interest Income (as defined) withdrawn or
withdrawable. Thereafter, income will be allocated in proportion to cash
distributions or if there are no distributions from 100% to 60% to RSWIII and
from 0% to 40% to the co-venturers. Allocations of the Partnership's
operations for financial reporting purposes have been made in conformity with
the allocations of taxable income or tax loss.
Gains or losses resulting from sales or other dispositions of the projects
shall be allocated according to the formulas provided in the joint venture
agreements.
Distributions
During the Guaranty Periods, (see below) the co-venturers were entitled to
withdraw all available Excess Gross Rentals and Interest Income prior to any
distributions (as defined in the joint venture agreements). In addition,
RSWIII was to be distributed from $2,500 to $7,500 from certain joint
ventures, as a return of capital on an annual basis. At the end of the
Guaranty Period, the co-venturers were entitled to any Excess Gross Rentals
that were available for distribution not previously withdrawn. The
Partnership and the co-venturers agreed that during the Guaranty Period the
co-venturers could withdraw estimated Excess Gross Rentals and Interest Income
with a final computation of Excess Gross Rentals and Interest Income to be
made at the end of each Guaranty Period.
Subsequent to the Guaranty Periods, distributable funds will be distributed
first, to repay accrued interest and principal on certain loans, second, to
RSWIII until RSWIII has received cumulative annual distributions from $2,500
to $5,000 from certain joint ventures plus cumulative distributions of
preferred equity, with the balance distributed to RSWIII and to the co-
venturers, as described in the joint venture agreements.
Distributions of net proceeds upon the sale or disposition of the projects
shall be made in accordance with formulas provided in the joint venture
agreements.
Guaranty Periods
The joint venture agreements provided that in the event that certain
expenditures exceed certain revenues, loan proceeds and capital contributions
during the Guaranty Periods (as defined in the joint venture agreements), the
co-venturers were required to fund amounts equal to the deficiencies.
For specified periods of time subsequent to the Guaranty Periods, certain
of the joint venture agreements required that mandatory loans be made to the
joint ventures to the extent that operating revenues were insufficient to pay
operating expenses. Thereafter, optional loans may be made by RSWIII and the
co-venturers to the joint ventures to cover such operating deficiencies. The
mandatory and optional loans shall be unsecured and shall generally bear
interest at prime plus one or two percent per annum.
The Guaranty Periods for each of the joint ventures were from the date
RSWIII entered a joint venture for a period ranging from one to three years
after the completion of construction, as defined in the joint venture
agreements. Guaranty and mandatory loan periods for all of the joint ventures
have expired. In addition, guarantees of construction costs by the co-
venturers were generally funded outside of the joint ventures.
4. Unconsolidated real estate partnership
Equity Fountainhead I Venture
Effective May 1, 1987, Fountainhead I, Ltd. transferred ownership of the
Fountainhead I Apartments, subject to the related mortgage indebtedness and
certain other assets and liabilities, to a new entity, Equity-Fountainhead I
Venture ("Equity-Fountainhead I"), in exchange for a 50% general partnership
interest in Equity-Fountainhead I. The other general partner, an unaffiliated
party, E-FH-ONE Associates ("EFH") agreed to contribute up to $670,000 to fund
operating deficits of the property through 1990. Under the Equity-
Fountainhead I partnership agreement, Fountainhead I, Ltd. may fund or obtain
third-party financing for operating deficits not funded by EFH.
Fountainhead I, Ltd. recorded a loss on the transfer of the operating
property equal to 50% of the amount by which the sum of the historical
carrying basis of the property and certain other assets transferred to Equity-
Fountainhead I exceeded the mortgage note payable and other liabilities
assumed by Equity-Fountainhead I. The investment in Equity-Fountainhead I
represents Fountainhead I, Ltd.'s proportionate share (50%) of the amount by
which the sum of the carrying values of the property and certain other assets
transferred to Equity-Fountainhead I exceeded mortgage note payable and other
liabilities assumed by Equity-Fountainhead I, less Fountainhead I Ltd.'s
share of Equity-Fountainhead I losses to date and adjusted for the subsequent
dilution of Fountainhead I Ltd.'s investment in Equity-Fountainhead I, as
discussed further below.
During 1992, 1990 and 1989, Fountainhead I, Ltd. elected not to participate
in the cash calls from Equity-Fountainhead I required to fund operating
deficits in excess of the guaranteed minimum funding obligation of EFH. EFH
contributed funds to the joint venture to cover Fountainhead I, Ltd's share of
the cash call amounts. As a result, in accordance with the venture agreement,
Fountainhead I, Ltd.'s ownership interest in Equity-Fountainhead I has been
reduced to approximately 15% as of December 31, 1992. The dilution of
Fountainhead I Ltd.'s investment in Equity-Fountainhead I resulting from the
failure to participate in 1992 cash calls resulted in a gain of $262,000,
which is reflected on the accompanying statement of operations.
Permanent financing for Fountainhead I, Ltd. was provided through Multi-
Family Housing Revenue Bonds issued by the Bexar County Housing Finance
Corporation. The 11.7% nonrecourse mortgage note, in the principal amount of
$6,350,000, was collateralized by the operating property and was assumed by
Equity-Fountainhead I, effective May 1, 1987 in connection with the transfer
of the operating property. During 1991, Equity-Fountainhead I had stopped
funding the venture's operating deficits and at December 31, 1991 Equity-
Fountainhead I was in violation of the loan agreement for failure to make full
and timely debt service payments. Effective August 1, 1992, the new venture
partner completed a refinancing of the debt arrangement with the lender and is
no longer in default of the debt obligation. In connection with this
refinancing, which significantly reduced the current interest rate on the
debt, the principal amount of the venture's obligation was increased to
$7,570,000. Cash calls by Equity-Fountainhead I for 1992 were to pay for
costs associated with this debt refinancing.
As of December 31, 1992, the carrying value of Fountainhead I Ltd.'s
remaining investment in Equity-Fountainhead I was ($437,000). Due to the
diluted and subordinated nature of the venture's remaining investment,
management does not expect to realize any future cash returns, despite the
debt refinancing referred to above. Based on the equity method of accounting
for general partnership interests, for as long as it continues to hold its
investment in Equity-Fountainhead I, Fountainhead I, Ltd. will continue to
recognize its allocated share of the income or losses from operations and the
gains and losses from the future sale or refinancing of the operating
investment property.
5. Related Party Transactions
The 1992 Combined Joint Ventures have entered into property and partnership
management agreements whereby the co-venturers and certain of their affiliates
are entitled to receive fees in connection with the management of the
investment properties. The property management fees are set at a rate of 5%
to 6% of gross revenues, as defined.
For one joint venture, a guaranty fee of $325,000 was paid to the co-
venturer and an affiliate in exchange for the guaranty described in Note 2.
This fee has been capitalized as part of the cost of the property.
Certain of the joint ventures and co-venturers use a centralized cash
management system operated by an affiliated entity. Under this system,
substantially all of the joint ventures' receipts are deposited directly to
the affiliated entity's bank account and substantially all the of joint
ventures' operating expenses and other disbursements are paid from this
central bank account. These receipts and payments are accounted for as
accounts payable to and accounts receivable from affiliates.
Pursuant to the guaranty and mandatory loan periods for the joint ventures,
the co-venturers of the joint ventures were required to fund operating
deficits. Thereafter, optional loans may be made by the Partnership and the
co-venturers at their discretion. At December 31, 1992, outstanding mandatory
and optional loans payable to the venture partners of the 1992 Combined Joint
Ventures totalled approximately $4,479,000. These loans generally bear
interest at prime plus 1%-2% and are payable from distributable funds, as
defined.
6. Mortgage notes payable
Mortgage notes payable at December 31, 1992 consists of the following:
1992
Nonrecourse mortgage note secured by the
Summerview apartment property due August
1, 2007. Monthly payments of interest
only are due at 6.75% through July, 1996.
Thereafter at a rate to be determined by
the remarketing agent of the bonds. (See
discussion of refinancing below). $10,200,000
Mortgage note secured by the Fieldstone
at Brandermill apartment property.
Interest on the note is at a variable
rate (with an 8% maximum through 1994) as
borne by the Bonds, determined weekly.
The average interest rate paid during
1992 was 3.3%. Interest only is payable
monthly with all principal payments to be
made upon the expiration of the letter of
credit on September 15, 1996, or, if
extended, no later than August 24, 2007. 16,750,000
Nonrecourse mortgage notes secured by
the Grayson Square apartment property
and all revenues derived therefrom. Debt
has been modified with an effective
interest rate of approximately 8%
through March, 1996. Interest only is
payable and due monthly through
November, 1994, and thereafter monthly
installments of principal and interest
are due through April, 2005. (See
discussion
of modification below.) 8,415,000
10.55% mortgage notes secured by the
Pacific Glen apartment property and all
revenues derived therefrom, maturing
December, 2005. Interest only is payable
monthly. (See discussion regarding
default below). 17,000,000
10.46% mortgage notes secured by the
Oakridge apartment property and revenues
derived therefrom, maturing December,
2005. Interest only is payable monthly.
(See discussion regarding default below).
11,800,000
10.17% mortgage notes secured by the
Seascape apartment property and revenues
derived therefrom, maturing December,
2005. Interest only is payable monthly.
(See discussion regarding default below). 13,200,000
77,365,000
Less amounts in default and classified as
current (42,000,000)
$ 35,365,000
General information
All of the above mortgage loans have been provided through the issuance of
Multi-Family Housing Revenue Bonds. Generally, the interest on the
underlying bonds is intended to be exempt from Federal income tax pursuant to
Section 103 of the Internal Revenue Code. Substantially all of the proceeds
of the bonds are to be utilized to finance multi-family housing of which 20%
or more of the units are to be leased to low and moderate income families as
defined by the United States Department of Housing and Urban Development.
In addition to being secured by the respective venture's operating
investment properties, the loans are generally secured by a bank letter of
credit equal to the principal amount of the underlying bonds plus an amount
of accrued interest. The letter of credit provides security to underlying
bondholders in the event of a default on the mortgage loan by the venture.
The ventures generally pay the issuers of the letter of credit annual fees
ranging from 1.25% to 1.50% of the letter of credit amount.
At specified dates, as defined by the bond indenture, the Partnership may
elect to prepay the mortgage loans in order to effect the redemption of
bonds. The prepayment prices ranges from 100% to 106% of the outstanding
balance. The notes are subject to mandatory prepayment if the bonds are
required to be redeemed as a result of loss of tax exempt status, failure of
the bonds to be remarketed, or certain other events specified in the bond
indentures.
The aggregate minimum maturities of mortgage notes payable not in default
for each of the next five years and thereafter are as follows:
1993 $ -
1994 11,000
1995 82,000
1996 27,038,000
1997 95,000
Thereafter 8,139,000
$35,365,000
Refinancing and Modification
On August 1, 1989, the original loan of the Summerview joint venture was
refunded with the proceeds from a new $10,200,000 Collateralized Loan to
Lender Housing Revenue Bond issue. The venture incurred and capitalized
$202,000 in new loan costs at the time of the refinancing. The new mortgage
loan is secured by a deed to secure debt and a security agreement covering
the venture's real and personal property. The new bonds are subject to a
mandatory remarketing on August 1, 1996, and the letter of credit expires
September 1, 1996. The balance in a restricted cash reserve fund related to
the loan agreement was $72,000 at December 31, 1992. This amount ($300 per
apartment unit) is required under the loan agreement to replace, repair and
to provide major maintenance for the property.
In October, 1989 the Grayson Square joint venture negotiated a modification
of its loan agreement. Unpaid accrued interest through the date of the
modification was added to the principal balance of the notes and the interest
rate was reduced. In addition, closing costs were paid from the proceeds of
the modified notes. Under the terms of the modification agreement, the joint
venture was required to establish a debt service reserve account, an
operating income account, and a replacement reserve account. The debt
service reserve account was established during 1989 in the form of a $254,000
Refinancing Loan from the co-venturer. The loan is noninterest bearing. The
operating income account, as defined, was established via the venture's
monthly net operating income payments, as defined. These funds are held in a
mortgage escrow deposit account for the payment of certain operating
expenses. The replacement reserve account was established, pursuant to the
modification agreement, with the excess of funds in the operating income
account after making the required payments for the operating expenses as
specified in the agreement. The modification agreement requires certain
payments into these accounts and restricts payments out of these accounts.
Amounts in the replacement reserve account and debt service reserve account
are included in the debt service total in the accompanying balance sheets.
The balance in the replacement and debt service reserve accounts was $304,000
at December 31, 1992. As part of the negotiated modification agreement, the
lender received a 50% interest in future sales and refinancing proceeds above
specified levels.
Default and foreclosure status of certain obligations
During 1990, the Oakridge joint venture ceased to meet the debt service
requirements of the developer loan and the underlying bonds. As a result,
the joint venture is in default of the developer loan. Pursuant to the terms
of the loan agreement, the joint venture is subject to various remedies
including, but not limited to, having the entire unpaid principal amounts of
the developer loan and underlying bonds and all other indebtedness under the
agreements declared immediately due and payable and foreclosure on the
operating investment property. The lender has filed a complaint seeking
foreclosure on the venture's operating investment property. In connection
with the complaint, a Receiver was appointed to manage the property during
1992. The joint venture is currently negotiating to resolve the lawsuit
through a refinancing of the outstanding debt obligations, which negotiations
are ongoing. The ultimate outcome of the litigation cannot presently be
determined.
During 1989, the Seascape joint venture ceased to meet the debt service
requirements of the developer loan and the underlying bonds. As a result,
the joint venture is in default of the developer loan and bond covenants.
Pursuant to the terms of the loan agreement, the joint venture is subject to
various remedies including, but not limited to, having the entire unpaid
principal amounts of the developer loan and underlying bonds and all other
indebtedness under the agreements declared immediately due and payable and
foreclosure on the operating investment property. The lender has filed a
complaint seeking foreclosure on the venture's operating investment property.
In connection with the complaint, a Receiver was appointed to manage the
property in October 1991. The venture is negotiating to resolve the lawsuit
through a refinancing of the outstanding debt obligations, which negotiations
are ongoing. The ultimate outcome of the litigation cannot presently be
determined.
During 1989, the Pacific Glen joint venture ceased to meet the debt service
requirements of the developer loan and the underlying bonds. As a result,
the joint venture is in default of the developer loan. Pursuant to the terms
of the loan agreement, the joint venture is subject to various remedies
including, but not limited to, having the entire unpaid principal amounts of
the developer loan and underlying bonds and all other indebtedness under the
agreements declared immediately due and payable and foreclosure on the
operating investment property. The joint venture is currently in
negotiations with the financial institution in an attempt to restructure the
terms of the loan. The lender filed a complaint in 1991 seeking foreclosure
on the venture's operating investment property. In response to this and
other actions by the lender, on October 3, 1991, the venture filed a
Voluntary Petition for Chapter 11 Bankruptcy in the United States Bankruptcy
Court of California. The venture is continuing its operations and continues
to negotiate with the lender on a possible refinancing of its indebtedness.
The success of such negotiations and the related outcome of the bankruptcy
proceedings cannot be predicted at this time. Management of the joint venture
has determined that the value of the operating investment property, which
serves as collateral for the developer loan, is insufficient to cover the
interest portion of scheduled payments on its pre-petition debt obligations.
Therefore, the joint venture has discontinued accruing interest on this
obligation as of October 3, 1991. Contractual interest on these obligations
amounted to approximately $2,348,000 for 1992.
7. Contingencies
As discussed further in Notes 3, 4 and 6, the 1992 Combined Joint Ventures'
operating investment properties have been adversely affected by an oversupply
of competing rental apartment properties in the local markets in which the
properties are located. The effects of the resulting competition, combined
with high original debt service costs, resulted in the inability of all of
the joint ventures to meet their original debt service obligations without
contributions from the venture owners. Cash flow deficits continue to be
experienced at certain of these joint ventures at the present time. At
December 31, 1992, three ventures were in violation of their respective
mortgage loan agreements. Management of RSWIII believes that there is a
strong likelihood that these properties will be lost to foreclosure in 1993.
In addition, while three of the remaining ventures have obtained more
favorable financing terms, additional relief from debt service obligations
and continued financial support from the venture owners may be required if
the properties' operations do not improve. As a result of these situations,
the ability of the joint ventures to continue their operations and realize
their assets is dependent upon future events, including their obtaining
sufficient working capital to finance continuance of their operations,
obtaining additional funds to finance their operations, obtaining additional
funds to finance their other liabilities, the continued financial support of
their partners and the modification of their debt agreements. The effects of
the eventual outcome of these matters on the joint ventures cannot presently
be determined. These uncertainties raise substantial doubt about the ability
of the 1992 Combined Joint Ventures to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
be required as a result of the outcome of these uncertainties. The
management of the 1992 Combined Joint Ventures have been negotiating with the
mortgage holders on certain of the operating investment properties in efforts
to cure the outstanding defaults and obtain relief from the current debt
service obligations. Management of RSWIII has also reviewed its portfolio of
investment properties to identify those with the best financial prospects and
plans to use its limited cash reserves toward the preservation of those
assets.
Schedule XI - Combined Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>
1992 COMBINED JOINT VENTURES OF REALTY SOUTHWEST FUND III, LTD.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1992
(in thousands)
Costs
Capitalized Life on Which
Initial Cost to (Removed) Depreciation
Combined Joint Subsequent to Gross Amount at Which Carried at in Latest
Ventures Acquisition End of Year Income
Buildings & Buildings & Buildings & Accumulated Date of Date Statement
Description Encumbrances Land Improvements Improvements Land Improvements Total Depreciation Construction Acquired is Computed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Joint Ventures:
Apartment
Complex;
Germantown,
MD $16,750 $2,358 $6,847 $6,733 $2,358 $13,580 $15,938 $4,087 1986 4/24/85 5 - 30 yrs
Apartment
Complex;
Agoura Hills,
CA 11,800 1,287 - 11,861 1,875 11,273 13,148 2,715 1986 4/30/85 5 - 30 yrs
Apartment
Complex;
Azusa, CA 17,000 1,580 - 14,133 4,368 11,345 15,713 2,860 1985 5/7/85 5 - 30 yrs
Apartment
Complex;
Carlsbad, CA 13,200 219 - 13,894 2,359 11,753 14,112 2,747 1986 5/30/85 5 - 30 yrs
Apartment
Complex;
Grapevine, TX 8,415 1,128 - 6,198 1,128 6,198 7,326 1,516 1986 10/3/85 5 - 30 yrs
Apartment
Complex;
Atlanta, GA 10,200 1,118 10,383 (719) 1,067 9,716 10,783 3,102 1985 10/8/85 5 - 30 yrs
$77,365 $ 7,690 $17,230 $52,100 $13,155 $63,865 $77,020 $17,027
Notes
(A) The aggregate cost of real estate owned at December 31, 1992 for Federal income tax purposes is approximately $73,435,000.
(B) See Note 6 to Combined Financial Statements for a description of the debt encumbering these properties.
(C) Reconciliation of real estate owned:
1992
Balance at beginning of year $ 76,814
Costs capitalized subsequent to acquisition 206
Balance at end of year $ 77,020
(D) Reconciliation of accumulated depreciation:
Balance at beginning of year $ 14,668
Depreciation expense 2,359
Balance at end of year $ 17,027
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the year ended March 31, 1995 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 29
<SECURITIES> 0
<RECEIVABLES> 26
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 55
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 55
<CURRENT-LIABILITIES> 250
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> (11,397)
<TOTAL-LIABILITY-AND-EQUITY> 55
<SALES> 0
<TOTAL-REVENUES> 15
<CGS> 0
<TOTAL-COSTS> 506
<OTHER-EXPENSES> 1,621
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,112)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,112)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,112)
<EPS-PRIMARY> (50.17)
<EPS-DILUTED> (50.17)
</TABLE>
