UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-14350
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BALCOR REALTY INVESTORS 85-SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Illinois 36-3333344
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 Waukegan Rd.
Bannockburn, IL 60015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 267-1600
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [X]
<PAGE>
PART I
Item 1. Business
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Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (the
"Registrant") is a limited partnership formed in 1984 under the laws of the
State of Illinois. The Registrant raised $59,092,000 from sales of Limited
Partnership Interests. The Registrant has retained cash reserves from the sale
of its real estate investments for contingencies which exist or may arise. The
Registrant's operations currently consist of interest income earned on
short-term investments and the payment of administrative expenses.
The Registrant utilized the net offering proceeds to acquire eight real
property investments and a minority joint venture interest in one additional
real property, and has since disposed of all of these investments. The
Partnership Agreement generally provides that the proceeds of any sale or
refinancing of the Registrant's properties will not be reinvested in new
acquisitions.
The Partnership Agreement provides for the dissolution of the Registrant upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Registrant sold three properties. In addition,
during 1996, the property in which the Registrant held a minority joint venture
interest was sold. During 1997, the Registrant sold the Howell Station
Apartments and the Registrant's remaining real estate investment, the North
Hill Apartments. The Registrant has retained a portion of the cash from the
property sales to satisfy obligations of the Registrant as well as establish a
reserve for contingencies. The timing of the termination of the Registrant and
final distribution of cash will depend upon the nature and extent of
liabilities and contingencies which exist or may arise. Such contingencies may
include legal and other fees and costs stemming from litigation involving the
Registrant including, but not limited to, the lawsuits discussed in "Item 3.
Legal Proceedings". In the absence of any such contingency, the reserves will
be paid within twelve months of the last property being sold. In the event a
contingency continues to exist or arises, reserves may be held by the
Registrant for a longer period of time.
During May 1997, the Registrant sold the Howell Station Apartments in an all
cash sale for $10,000,000. During September 1997, the Registrant sold the North
Hill Apartments for a sales price of $21,000,000. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" for additional information.
The Registrant no longer has an ownership interest in any real estate. The
General Partner is not aware of any material potential liability relating to
environmental issues or conditions affecting real estate formerly owned by the
Registrant.
The officers and employees of Balcor Partners-XVIII, the General Partner of the
Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.
Item 2. Properties
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<PAGE>
As of December 31, 1997, the Registrant did not own any properties.
In the opinion of the General Partner, the Registrant has obtained adequate
insurance coverage.
See Notes to Financial Statements for other information regarding former real
estate property investments.
Item 3. Legal Proceedings
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Masri vs. Lehman Brothers, Inc., et al.
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On February 29, 1996, a proposed class action complaint was filed, Raymond
Masri vs. Lehman Brothers, Inc., et al., Case No. 96/103727 (Supreme Court of
the State of New York, County of New York). The Registrant, additional limited
partnerships which were sponsored by The Balcor Company, three limited
partnerships sponsored by the predecessor of Lehman Brothers, Inc. (together
with the Registrant and the affiliated partnerships, the "Defendant
Partnerships"), Lehman Brothers, Inc. and Smith Barney, Inc. are defendants.
The complaint alleges, among other things, common law fraud and deceit,
negligent misrepresentation and breach of fiduciary duty relating to the
disclosure of information in the offering of limited partnership interests in
the Defendant Partnerships. The complaint seeks judgment for compensatory
damages equal to the amount invested in the Defendant Partnerships by the
proposed class plus interest accrued thereon; general damages for injuries
arising from the defendants' alleged actions; recovery from the defendants of
all profits received by them as a result of their alleged actions relating to
the Defendant Partnerships; exemplary damages; attorneys' fees and other costs.
The defendants intend to vigorously contest this action. No class has been
certified as of this date. The Registrant believes it has meritorious defenses
to contest the claims. It is not determinable at this time whether or not an
unfavorable decision in this action would have a material adverse impact on the
Registrant.
Plaintiffs' counsel has indicated an intent to withdraw this complaint.
Raymond Masri has joined as an additional plaintiff in the Lenore Klein matter
discussed below.
Klein, et al. vs. Lehman Brothers, Inc., et al.
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On August 30, 1996, a proposed class action complaint was filed, Lenore Klein,
et al. vs. Lehman Brothers, Inc., et al. (Superior Court of New Jersey, Law
Division, Union County, Docket No. Unn-L-5162-96). The complaint was amended on
each of October 18, 1996, December 5, 1997 and January 15, 1998. The
Registrant, additional limited partnerships which were sponsored by The Balcor
Company (together with the Registrant, the "Affiliated Partnerships"), The
Balcor Company, American Express Company, Lehman Brothers, Inc., Smith Barney,
Inc., American Express Financial Advisors, and other affiliated entities and
various individuals are named defendants in the action. The most recent amended
complaint, plaintiffs' Third Amended Complaint, alleges, among other things,
common law fraud and deceit, negligent misrepresentation, breach of contract,
breach of fiduciary duty and violation of certain New Jersey statutes relating
to the disclosure of information in the offering of limited partnership
<PAGE>
interests in the Affiliated Partnerships, the marketing of interests in the
Affiliated Partnerships and the acquisition of real properties for the
Affiliated Partnerships. The Third Amended Complaint seeks judgment for
compensatory damages equal to the amount invested in the Affiliated
Partnerships by the proposed class plus interest; general damages for injuries
arising from the defendants' alleged actions; equitable relief, including
rescission, on certain counts; punitive damages; treble damages on certain
counts; recovery from the defendants of all profits received by them as a
result of their alleged actions relating to the Affiliated Partnerships;
attorneys' fees and other costs.
The defendants intend to vigorously contest this action. No class has been
certified as of this date. The Registrant believes it has meritorious defenses
to contest the claims. It is not determinable at this time whether or not an
unfavorable decision in this action would have a material adverse impact on the
Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of the Limited Partners of the Registrant
during 1997.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
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Matters
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There has not been an established public market for Limited Partnership
Interests and it is not anticipated that one will develop. For information
regarding distributions, See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources".
As of December 31, 1997, the number of record holders of Limited Partnership
Interests of the Registrant was 4,672.
Item 6. Selected Financial Data
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Year ended December 31,
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1997 1996 1995 1994 1993
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Total income $3,144,396 $14,299,834 $12,057,899 $11,089,861 $11,502,928
(Loss) income before
gains on sales,
affiliates'
participation in
joint ventures
and extraordinary
items (386,939) 4,798,662 (87,295) (487,293) (1,222,961)
Net income (loss) 9,546,094 22,556,310 (27,411) (70,139) 2,213,346
Net income (loss)
per Limited
Partnership
Interest - Basic
and Diluted 160.86 377.90 (.46) (1.18) 37.08
Total assets 2,472,953 27,755,377 45,259,656 46,571,333 47,232,370
Mortgage notes
payable None 24,324,028 50,428,070 50,987,329 51,850,501
Distributions per
Limited Part-
nership Interest (A) 174.02 230.00 7.50 None None
(A) These amounts include distributions of original capital of $159.02 and
$200.00 per Limited Partnership Interest for 1997 and 1996, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Operations
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Summary of Operations
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<PAGE>
Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (the
"Partnership") sold two properties during 1997 and three properties during
1996, and recognized gains in connection with these sales. The property in
which the Partnership owned a minority joint venture interest was also sold
during 1996 and the Partnership recognized its share of the gain on sale. As
a result of the higher gains recognized from the property sales in 1996, net
income decreased during 1997 as compared to 1996 and the Partnership recognized
net income during 1996 as compared to a net loss during 1995. Further
discussion of the Partnership's operations is summarized below.
1997 Compared to 1996
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During 1997, the Partnership sold the Howell Station and North Hill apartment
complexes and recognized gains in connection with these sales totaling
$11,416,395. During 1996, the Partnership sold the Country Ridge, Shadowridge
and Park Place-Phase II apartment complexes and recognized gains in connection
with these sales totaling $19,528,414. These property sales also resulted in
decreases in rental and service income, interest expense on mortgage notes
payable, depreciation, amortization of deferred expenses, property operating
expense, real estate taxes and property management fees during 1997 as compared
to 1996.
Due to higher average cash balances resulting from the investment of the
proceeds from the 1996 property sales prior to distribution to Limited Partners
in 1997, interest income on short-term investments decreased during 1997 as
compared to 1996.
The Partnership owned a minority joint venture interest in the Lakeville Resort
Apartments. As a result of the 1996 sale of the property, participation in
income of joint venture with an affiliate ceased during 1996.
The Partnership recognized other income during 1997 primarily in connection
with refunds of prior years' insurance premiums relating to the Partnership's
properties.
The North Hill and Shadowridge apartment complexes were both owned by joint
ventures consisting of the Partnership and an affiliate. Primarily as a result
of the higher gain recognized in connection with the 1997 sale of the North
Hill Apartments as compared to the gain recognized in connection with the 1996
sale of the Shadowridge Apartments, affiliates' participation in income from
joint ventures increased during 1997 as compared to 1996.
In connection with the sale of the Howell Station Apartments during 1997, the
Partnership wrote off the remaining unamortized deferred financing fees of
$95,822 and paid a prepayment penalty of $283,458. In connection with the sale
of the North Hill Apartments during 1997, the joint venture that owned the
property wrote off the remaining unamortized deferred financing fees of
$617,919 of which $154,480 represents the North Hill Apartments minority joint
venture partner's share. Additionally, in connection with the 1994 bond
refinancing of the North Hill Apartments, the joint venture paid a bond
discount fee of $84,400 which was recorded as a reduction of the underlying
mortgage balance. In connection with the sale of the property, the remaining
unamortized balance of the discount fee of $61,894 was written off. The
<PAGE>
minority joint venture partner's share of this amount was $15,473. During 1996,
the Partnership wrote off the remaining unamortized deferred financing fees of
$440,081 in connection with the sales of the Country Ridge, Shadowridge and
Park Place - Phase II apartment complexes, of which $7,165 represents the
Shadowridge Apartments minority joint venture partner's share. These amounts
were recognized as debt extinguishment expense and classified as extraordinary
items for financial statement purposes.
As a result of the sale of the North Hill Apartments, the joint venture
recognized an extraordinary gain on forgiveness of debt of $1,350,000, of which
$337,500 represents the North Hill Apartments' minority joint venture partner's
share. See Notes 5 and 12 of Notes to Financial Statements for additional
information.
1996 Compared to 1995
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The Partnership sold the Country Ridge, Shadowridge and Park Place - Phase II
apartment complexes during 1996 which resulted in a decrease in rental and
service income of approximately $2,841,000 during 1996 as compared to 1995.
This decrease was partially offset by increases of approximately $128,000 in
rental and service income at the Partnership's two remaining properties.
Due to higher average cash balances as a result of the investment of proceeds
from the 1996 property sales prior to distribution to the Limited Partners,
interest income on short-term investments increased during 1996 as compared to
1995.
The Partnership owned a minority joint venture interest in the Lakeville Resort
Apartments. The Partnership recognized income from participation in joint
venture with an affiliate during 1996 as compared to a loss in 1995 primarily
due to the recognition of the Partnership's share of the gain on the 1996 sale
of the property.
As a result of the three property sales in 1996, interest expense on mortgage
notes payable, depreciation expense, amortization of deferred expenses, and
property management fees decreased during 1996 as compared to 1995.
As a result of the 1996 property sales, property operating expense for 1996
decreased by approximately $880,000 when compared to 1995. Property operating
expense also decreased during 1995 by approximately $161,000 due to exterior
painting expenditures at North Hill Apartments. These decreases were partially
offset by higher payroll and utilities expenses of approximately $89,000 at the
Country Ridge, North Hill and Park Place - Phase II apartment complexes.
Real estate tax expense for 1996 decreased by approximately $158,000 when
compared to 1995 due to the 1996 property sales. This decrease was partially
offset by an approximately $13,000 increase in real estate tax expense at the
Howell Station Apartments as a result of an increase in the assessed value of
the property.
The Partnership incurred higher legal, consulting, printing, and postage costs
in connection with a response to a tender offer during the fourth quarter of
1995. As a result, administrative expense decreased during 1996 as compared to
1995. This decrease was partially offset by higher printing, postage and
investor servicing costs of approximately $28,000 incurred in connection with
the Partnership's response to a tender offer during 1996.
<PAGE>
The North Hill and Shadowridge apartment complexes were both owned by joint
ventures consisting of the Partnership and an affiliate. Primarily as a result
of the gain recognized in connection with the 1996 sale of the Shadowridge
Apartments affiliates' participation in income from joint ventures increased
during 1996 as compared to 1995.
In connection with a settlement reached with the seller of the Shadowridge
Apartments in 1995, the Partnership recognized an extraordinary gain on
forgiveness of debt of $69,409, of which $20,823 represented the affiliate's
share.
In connection with the sale of Lakeville Resort Apartments in 1996 the
Partnership recognized its share of the write off of the remaining unamortized
deferred expenses in the amount of $193,532. In addition, in connection with
the June 1995 loan refinancing on the property, the Partnership recognized it's
share of the write off of unamortized deferred expenses of $58,521 in 1995. For
financial statement purposes, these amounts were recognized as participation in
debt extinguishment expense of joint venture with an affiliate.
Liquidity and Capital Resources
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The cash position of the Partnership decreased by approximately $3,474,000 as
of December 31, 1997 when compared to December 31, 1996 primarily due to the
distribution paid to Limited Partners during January 1997 from the proceeds
received from the 1996 property sales. Cash flow of approximately $137,000 was
provided by the Partnership's operating activities which consisted primarily of
cash flow generated from property operations, interest income on short-term
investments and the release of funds held in escrow on certain of the
Partnership's remaining properties. These amounts were partially offset by the
payment of expenses on sold properties and administrative expenses. Investing
activities consisted of net proceeds of approximately $13,630,000 received from
the 1997 property sales and a distribution from the joint venture with an
affiliate of approximately $1,047,000. Financing activities consisted of the
payment of distributions to Limited Partners of approximately $10,283,000, the
payment of state withholding taxes of approximately $596,000 relating to the
gains on the sales of the Howell Station and North Hill apartment complexes,
the repayment of a mortgage note payable of approximately $6,444,000, principal
payments on mortgage notes payable of approximately $144,000, distributions to
the joint venture partner - affiliate of approximately $1,179,000 and the
release of a capital improvement escrow of approximately $358,000. In January
1998, the Partnership made a distribution of $719,778 to Limited Partners as
discussed below.
The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Partnership sold three properties. In addition,
the property in which the Partnership held a minority joint venture interest
was sold. During 1997, the Partnership sold the Howell Station Apartments and
the Partnership's remaining real estate investment, the North Hill Apartments.
The Partnership has retained a portion of the proceeds from the sales to
satisfy obligations of the Partnership, as well as establish a reserve for
contingencies. The timing of the termination of the Partnership and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
<PAGE>
and other fees and costs stemming from litigation involving the Partnership
including, but not limited to, the lawsuits discussed in "Item 3. Legal
Proceedings". In the absence of any such contingency, the reserves will be paid
within twelve months of the last property being sold. In the event a
contingency continues to exist or arises, reserves may be held by the
Partnership for a longer period of time.
The Lakeville Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. Pursuant to the sale agreement for the Lakeville
Resort Apartments, $500,000 of the sale proceeds was retained by the joint
venture and was unavailable for distribution until February 1997, at which time
the funds were released in full to the joint venture. The Partnership's share
of the funds was $201,250. The Partnership also received a distribution from
the joint venture of $845,410, principally consisting of its share of repair
escrows released during 1997.
In May 1997, the Partnership sold the Howell Station Apartments in an all cash
sale for $10,000,000. From the proceeds of the sale, the Partnership paid
$6,443,945 to the third party mortgage holder in full satisfaction of the first
mortgage loan, $283,458 of prepayment penalties and $272,478 in selling costs.
In addition, the Partnership paid a state withholding tax of $214,203 relating
to the gain on the sale of the property. Pursuant to the terms of the sale,
$100,000 of the proceeds was retained by the Partnership and was unavailable
for distribution until August 1997, at which time the funds were released in
full. The remainder of the available proceeds were distributed to Limited
Partners in July 1997. See Note 11 of Notes to Financial Statements for
additional information.
The North Hill Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. In September 1997, the joint venture sold the
property for a sales price of $21,000,000. The purchaser of the property took
title subject to the existing first mortgage loan in the amount of $16,470,524.
Since the sales proceeds did not exceed a certain predetermined level as set
forth in the loan agreement, the $1,350,000 non-interest bearing note from an
unaffiliated party was forgiven in connection with the sale. From the proceeds
of the sale, the joint venture paid $164,705 in fees relating to the assumption
of the mortgage loan by the purchaser and $461,949 in selling costs. In
addition, a state withholding tax of $381,256 was paid relating to the gain on
the sale of the property, of which $95,314 was the minority joint venture
partner's share. The joint venture received the remaining sale proceeds of
$3,521,566, of which approximately $2,641,000 was the Partnership's share.
Pursuant to the terms of the sale, $500,000 of the proceeds was retained by the
joint venture and was unavailable for distribution until December 1997 at which
time the funds were released in full. The Partnership distributed its share of
the available sales proceeds to the Limited Partners in October 1997 and
January 1998. See Note 11 of Notes to Financial Statements for additional
information.
The Partnership commenced distributions in 1995 and paid one distribution of
$7.50 per Interest to Limited Partners from Net Cash Receipts. The Partnership
paid four distributions in 1996 totaling $230.00 per Interest to Limited
Partners of which $30.00 was from Net Cash Receipts and $200.00 was from Net
Cash Proceeds. The Partnership paid four distributions in 1997 totaling $174.02
per Interest to Limited Partners of which $15.00 was from Net Cash Receipts and
$159.02 was from Net Cash Proceeds.
In January 1998, the Partnership made a distribution of $719,778 ($12.18 per
Interest) to the holders of Limited Partnership Interests, representing
<PAGE>
remaining available Net Cash Receipts reserves of $7.25 per Interest and
available Net Cash Proceeds of $4.93 per Interest from the Partnership's share
of the sale holdback on the North Hill Apartments. Including the January 1998
distribution, Limited Partners have received cumulative distributions of Net
Cash Receipts of $59.75 per $1,000 Interest and Net Cash Proceeds of $363.95
per $1,000 Interest, totaling $423.70 per $1,000 Interest. No additional
distributions are anticipated to be made prior to the termination of the
Partnership. However, after paying final partnership expenses, any remaining
cash reserves will be distributed. Limited Partners will not recover a
substantial portion of their original investment.
Item 8. Financial Statements and Supplementary Data
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See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.
The net effect of the differences between the financial statements and the tax
returns is summarized as follows:
December 31, 1997 December 31, 1996
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Financial Tax Financial Tax
Statements Returns Statements Returns
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Total assets $2,472,953 $8,984,257 $27,755,377 $24,816,587
Partners' Capital
(deficit)
accounts:
General Partner (308,517) (308,517) (348,962) (469,072)
Limited Partners 2,718,136 9,247,017 3,995,822 3,744,858
Net income:
General Partner 40,445 160,555 225,563 376,981
Limited Partners 9,505,649 16,285,494 22,330,747 32,968,698
Per Limited Part-
nership Interest 160.86(A) 275.60 377.90(A) 557.92
(A) Amount represents basic and diluted net income per Limited Partnership
Interest.
Item 9. Changes in and Disagreements with Accountants on Accounting and
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Financial Disclosure
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There have been no changes in or disagreements with accountants on any matter
of accounting principles, practices or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
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(a) Neither the Registrant nor Balcor Partners-XVIII, its General Partner, has
a Board of Directors.
(b, c & e) The names, ages and business experience of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:
TITLE OFFICERS
Chairman, President and Chief Thomas E. Meador
Executive Officer
Senior Vice President Alexander J. Darragh
Senior Vice President John K. Powell, Jr.
Senior Managing Director, Chief Jayne A. Kosik
Financial Officer, Treasurer
and Assistant Secretary
Thomas E. Meador (age 50) joined Balcor in July 1979. He is Chairman,
President and Chief Executive Officer and has responsibility for all ongoing
day-to-day activities at Balcor. He is a member of the board of directors of
The Balcor Company. He is also Senior Vice President of American Express
Company and is responsible for its real estate operations worldwide. Prior to
joining Balcor, Mr. Meador was employed at the Harris Trust and Savings Bank in
the commercial real estate division where he was involved in various lending
activities. Mr. Meador received his M.B.A. degree from the Indiana University
Graduate School of Business.
Alexander J. Darragh (age 43) joined Balcor in September 1988 and is
responsible for real estate advisory services for Balcor and American Express
Company. Mr. Darragh received masters' degrees in Urban Geography from Queen's
University and in Urban Planning from Northwestern University.
John K. Powell Jr. (age 47) joined Balcor in September 1985 and is responsible
for portfolio and asset management matters relating to Balcor's partnerships.
Mr. Powell also has supervisory responsibility for Balcor's risk management
function. He is a member of the board of directors of The Balcor Company. He
received a Master of Planning degree from the University of Virginia. Mr.
Powell has been designated a Certified Real Estate Financier by the National
Society for Real Estate Finance and is a full member of the Urban Land
Institute.
Jayne A. Kosik (age 40) joined Balcor in August 1982 and, as Chief Financial
Officer, is responsible for Balcor's financial, human resources and treasury
functions. From June 1989 until October 1996, Ms. Kosik had supervisory
responsibility for accounting functions relating to Balcor's public and private
partnerships. She is also Treasurer and a Senior Managing Director of The
Balcor Company. Ms. Kosik is a Certified Public Accountant.
(d) There is no family relationship between any of the foregoing officers.
<PAGE>
(f) None of the foregoing officers or employees are currently involved in any
material legal proceedings nor were any such proceedings terminated during the
fourth quarter of 1997.
Item 11. Executive Compensation
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The Registrant paid $1,971 in 1997 with respect to one of the executive
officers and directors of Balcor Partners - XVIII, the General Partner. The
Registrant has not paid and does not propose to pay any remuneration to the
remaining executive officers and directors of the General Partner. The other
officers receive compensation from The Balcor Company (but not from the
Registrant) for services performed for various affiliated entities, which may
include services performed for the Registrant. However, the General Partner
believes that any such compensation attributable to services performed for the
Registrant is immaterial to the Registrant. See Note 10 of Notes to Financial
Statements for information relating to transactions with affiliates.
Item 12. Security Ownership of Certain Beneficial Owners and Management
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(a) The following entities are the sole Limited Partners which own
beneficially more than 5% of the outstanding Limited Partnership Interests of
the Registrant:
Name and Amount and
Address of Nature of Percent
Beneficial Beneficial of
Title of Class Owner Ownership Class
- --------------- ----------- ------------ ------------
Limited WIG 85-III 3,456.50 5.85%
Partnership Partners Limited
Interests Chicago, Partnership
Illinois Interests
Limited Metropolitan 2,567.00 4.34%
Partnership Acquisition VII, Limited
Interests L.L.C. Greenville, Partnership
South Carolina Interests
While Metropolitan Acquisition VII, L.L.C. individually owns less than 5% of
the Interests, for purposes of this Item 12, Metropolitan Acquisition VII,
L.L.C. is an affiliate of WIG 85-III Partners and, collectively, they own
10.19% of the Interests.
(b) Balcor Partners-XVIII and its officers and partners own as a group the
following Limited Partnership Interests of the Registrant:
Amount
Beneficially
Title of Class Owned Percent of Class
-------------- ------------- ----------------
<PAGE>
Limited Partnership
Interests None None
Relatives of the officers and affiliates of the partners of the General Partner
own an additional 1,215 Interests.
(c) The Registrant is not aware of any arrangements, the operation of which
may result in a change of control of the Registrant.
Item 13. Certain Relationships and Related Transactions
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(a & b) See Note 4 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.
See Note 10 of Notes to Financial Statements for additional information
relating to transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
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(a)
(1 & 2) See Index to Financial Statements in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement and Certificate of Limited Partnership,
set fourth as Exhibit 3 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-11 dated August 2, 1985 (Registration No. 2-97249), is
incorporated herein by reference.
(4) Form of Subscription Agreement set forth as Exhibit 4.1 to Amendment No. 1
to the Registrant's Registration Statement on Form S-11 dated August 2, 1985
(Registration No. 2-97249), and Form of Confirmation regarding Interests in the
Partnership set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q
for the quarter ended June 30, 1992 are incorporated herein by reference.
(10) Material Contracts:
(a)(i) Agreement of Sale and attachment thereto relating to the sale of Country
Ridge Apartments previously filed as Exhibit (2)(a) to the Registrant's Current
Report on Form 8-K dated April 23, 1996, is incorporated herein by reference.
(ii) Master Amendment and Agreement dated May 22, 1996 relating to the sale of
Country Ridge Apartments previously filed as Exhibit (99)(a) to the
Registrant's Current Report on Form 8-K dated July 5, 1996, is incorporated
herein by reference.
(iii) Master Amendment and Agreement #2 dated May 22, 1996 relating to the sale
of Country Ridge Apartments previously filed as Exhibit (99)(b) to the
Registrant's Current Report on Form 8-K dated July 5, 1996, is incorporated
herein by reference.
(b)(i) Agreement of Sale and attachment thereto relating to the sale of
Lakeville Resort Apartments previously filed as Exhibit (2)(b) to the
Registrant's Current Report on Form 8-K dated April 23, 1996, is incorporated
herein by reference.
(ii) Letter Agreements dated May 22, 1996 and July 8, 1996 relating to the sale
of Lakeville Resort Apartments previously filed as Exhibit (99)(c) to the
Registrant's Current Report on Form 8-K dated July 5, 1996, is incorporated
herein by reference.
(iii) Letter Agreement dated August 20, 1996 relating to the sale of Lakeville
Resort Apartments previously filed as Exhibit (99)(a) to the Registrant's
Current Report on Form 8-K dated August 20, 1996, is incorporated herein by
reference.
(iv) Letter Agreement dated September 19, 1996 relating to the sale of
<PAGE>
Lakeville Resort Apartments previously filed as Exhibit (10)(b)(iv) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, is incorporated herein by reference.
(v) Letter Agreement dated September 30, 1996 relating to the sale of Lakeville
Resort Apartments previously filed as Exhibit (10)(b)(v) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, is
incorporated herein by reference.
(c)(i) Agreement of Sale and attachment thereto relating to the sale of Park
Place Apartments - Phase II previously filed as Exhibit (2)(c) to the
Registrant's Current Report on Form 8-K dated April 23, 1996, is incorporated
herein by reference.
(ii) Letter Agreements dated May 22, 1996 and July 8, 1996 relating to the sale
of Park Place Apartments - Phase II previously filed as Exhibit (99)(d) to the
Registrant's Current Report on Form 8-K dated July 5, 1996, is incorporated
herein by reference.
(iii) First Amendment to Agreement of Sale relating to the sale of Park Place
Apartments - Phase II previously filed as Exhibit (10)(c)(iii) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, is incorporated herein by reference.
(d)(i) Agreement of Sale and attachment thereto relating to the sale of
Shadowridge Apartments previously filed as Exhibit (2)(a) to the Registrant's
Current Report on Form 8-K dated July 5, 1996, is incorporated herein by
reference.
(ii) First Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of Shadowridge Apartments previously filed as Exhibit (99) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
is incorporated herein by reference.
(e)(i) Agreement of Sale relating to the sale of North Hill Apartments, DeKalb
County, Georgia, previously filed as Exhibit (2) to the Registrant's Current
Report on Form 8-K dated May 22, 1997, is incorporated herein by reference.
(ii) First Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(ii) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.
(iii) Second Amendment to Agreement of Sale and Escrow Agreement relating to
the sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(iii) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.
(iv) Third Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(iv) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.
(v) Fourth Amendment to Agreement of Sale and Escrow Agreement relating to the
<PAGE>
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(v) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.
(vi) Fifth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(vi) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.
(vii) Sixth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(vii) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.
(viii) Letter Agreement dated June 30, 1997 relating to the sale of North Hill
Apartments, DeKalb County, Georgia, previously filed as Exhibit (10)(e)(viii)
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, is incorporated herein by reference.
(ix) Seventh Amendment to Agreement of Sale and Escrow Agreement relating to
the sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(ix) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.
(x) Eighth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(x) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, is incorporated herein by reference.
(f)(i) Agreement of Sale relating to the sale of Howell Station Apartments
previously filed as Exhibit (2)(b)(ii) to the Registrant's Current Report on
Form 8-K dated February 21, 1997, is incorporated herein by reference.
(ii) Amendment No.1 relating to the sale of Howell Station Apartments
previously filed as Exhibit (2)(b)(ii) to the Registrant's Current Report on
Form 8-K dated February 21, 1997, is incorporated herein by reference.
(iii) Agreement relating to the sale of Howell Station Apartments previously
filed as Exhibit (2)(b)(iii) to the Registrant's Current Report on Form 8-K
dated February 21, 1997, is incorporated herein by reference.
(iv) Amendment No. 2 to Agreement of Sale relating to the sale of Howell
Station Apartments previously filed as Exhibit (2)(b)(iv) to the Registrant's
Current Report on Form 8-K dated February 21, 1997, is incorporated herein by
reference.
(v) Amendment No. 3 to Agreement of Sale relating to Howell Station Apartments,
previously filed as Exhibit (10)(f)(v) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, is incorporated herein by
reference.
(vi) Amendment No. 4 to Agreement of Sale relating to Howell Station
Apartments, previously filed as Exhibit (10)(f)(vi) to the Registrant's
<PAGE>
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, is
incorporated herein by reference.
(vii) Amendment No. 5 to Agreement of Sale relating to Howell Station
Apartments, previously filed as Exhibit (10)(f)(vii) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, is
incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1997 is attached hereto.
(b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter
ended December 31, 1997.
(c) Exhibits: See Item 14(a)(3) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALCOR REALTY INVESTORS 85-SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
By: /s/Jayne A. Kosik
---------------------------------
Jayne A. Kosik
Senior Managing Director and Chief
Financial Officer (Principal
Accounting Officer)
of Balcor Partners-XVIII, the
General Partner
Date: March 25, 1998
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ---------------------- ------------------------------- --------------
President and Chief Executive
Officer (Principal Executive
Officer) of Balcor Partners-XVIII,
the General Partner
/s/Thomas E. Meador March 25, 1998
- --------------------- --------------
Thomas E. Meador
Senior Managing Director and Chief
Financial Officer (Principal
Accounting Officer) of
Balcor Partners-XVIII,
the General Partner
/s/Jayne A. Kosik March 25, 1998
- -------------------- --------------
Jayne A. Kosik
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1997 and 1996
Statements of Partners' Capital (Deficit), for the years ended December 31,
1997, 1996 and 1995
Statements of Income and Expenses, for the years ended December 31, 1997, 1996
and 1995
Statements of Cash Flows, for the years ended December 31, 1997, 1996 and 1995
Notes to Financial Statements
Financial Statement Schedules are omitted for the reason that they are
inapplicable or equivalent information has been included elsewhere herein.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Balcor Realty Investors 85-Series III
We have audited the financial statements of Balcor Realty Investors 85-Series
III (An Illinois Limited Partnership) as listed in the Index of this Form
10-K. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Balcor Realty Investors
85-Series III at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
As described in Note 2 to the financial statements, the partnership agreement
provides for the dissolution of the Partnership upon the disposition of all its
real estate interests. As of December 31, 1997, the Partnership has disposed of
all of its remaining real estate interests. Upon resolution of the litigation
described in Note 14 to the financial statements, the Partnership intends to
cease operations and dissolve.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 23, 1998
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
(AN ILLINOIS LIMITED PARTNERSHIP)
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
------------ --------------
Cash and cash equivalents $ 2,414,280 $ 5,888,040
Escrow deposits 696,354
Accounts and accrued interest receivable 58,673 93,191
Prepaid expenses 59,888
Deferred expenses, net of accumulated
amortization of $250,656 in 1996 781,323
Investment in joint venture with an affiliate 1,046,660
------------ --------------
2,472,953 8,565,456
------------ --------------
Investment in real estate:
Land 3,161,992
Buildings and improvements 27,767,583
--------------
30,929,575
Less accumulated depreciation 11,739,654
--------------
Investment in real estate, net of
accumulated depreciation 19,189,921
------------ --------------
$ 2,472,953 $ 27,755,377
============ ==============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 33,961 $ 39,006
Due to affiliates 29,373 85,504
Security deposits 159,650
Mortgage notes payable 24,324,028
------------ --------------
Total liabilities 63,334 24,608,188
Affiliates' participation in joint venture (499,671)
------------ --------------
63,334 24,108,517
Commitments and contingencies
Limited Partners' capital (59,092
Limited Partnership Interests issued
and outstanding) 2,718,136 3,995,822
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
(AN ILLINOIS LIMITED PARTNERSHIP)
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
(Continued)
1997 1996
------------ --------------
General Partner's deficit $ (308,517) $ (348,962)
------------ --------------
Total partners' capital 2,409,619 3,646,860
------------ --------------
$ 2,472,953 $ 27,755,377
============ ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
for the years ended December 31, 1997, 1996 and 1995
Partners Capital (Deficit) Accounts
------------- ------------- -------------
General Limited
Total Partner Partners
------------- ------------- -------------
Balance at December 31, 1994 $ (4,847,689) $ (574,251) $ (4,273,438)
Cash distributions to Limited
Partners (A) (443,190) (443,190)
Net loss for the year
ended December 31, 1995 (27,411) (274) (27,137)
------------- ------------- -------------
Balance at December 31, 1995 (5,318,290) (574,525) (4,743,765)
Cash distributions to Limited
Partners (A) (13,591,160) (13,591,160)
Net income for the year
ended December 31, 1996 22,556,310 225,563 22,330,747
------------- ------------- -------------
Balance at December 31, 1996 3,646,860 (348,962) 3,995,822
Cash distributions to Limited
Partners (A) (10,283,190) (10,283,190)
Deemed distribution (B) (500,145) (500,145)
Net income for the year
ended December 31, 1997 9,546,094 40,445 9,505,649
------------- ------------- -------------
Balance at December 31, 1997 $ 2,409,619 $ (308,517) $ 2,718,136
============= ============= =============
(A) Summary of cash distributions paid per Limited Partnership Interest:
1997 1996 1996
------------ ------------ ------------
First Quarter $ 74.50 $ 7.50 None
Second Quarter 11.52 7.50 None
Third Quarter 50.00 122.50 None
Fourth Quarter 38.00 92.50 $ 7.50
(B) This amount represents state withholding taxes paid on behalf of the
Limited Partners relating to the gain on the sales of the North Hill
and Howell Station apartment complexes.
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------- ------------- ------------
Income:
Rental and service $ 2,895,058 $ 9,176,157 $ 11,889,557
Interest on short-term
investments 223,352 248,586 170,938
Participation in income
(loss) of joint venture
with an affiliate 4,875,091 (2,596)
Other income 25,986
------------- ------------- -------------
Total income 3,144,396 14,299,834 12,057,899
------------- ------------- -------------
Expenses:
Interest on mortgage
notes payable 1,109,915 3,306,963 4,259,221
Depreciation 505,448 1,373,849 1,747,385
Amortization of deferred
expenses 90,088 131,305 141,321
Property operating 1,023,498 2,946,970 3,859,285
Real estate taxes 259,058 884,257 1,028,753
Property management fees 147,902 466,268 593,254
Administrative 395,426 391,560 515,975
------------- ------------- -------------
Total expenses 3,531,335 9,501,172 12,145,194
------------- ------------- -------------
(Loss) income before gains on
sales, affiliates'
participation in joint
ventures and extraordinary
items (386,939) 4,798,662 (87,295)
Gains on sales of properties 11,416,395 19,528,414
Affiliates' participation
in (income) loss from
joint ventures before
extraordinary items (1,606,722) (1,144,318) 69,819
------------- ------------- -------------
Income (loss) before
extraordinary items 9,422,734 23,182,758 (17,476)
------------- ------------- -------------
Extraordinary items:
Debt extinguishment expense (1,059,093) (440,081)
Affiliate's participation in
debt extinguishment expense 169,953 7,165
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
------------- ------------- ------------
Gain on forgiveness of debt 1,350,000 69,409
Affiliate's participation in
gain on forgiveness of debt (337,500) (20,823)
Participation in debt
extinguishment expense of
joint venture with an
affiliate (193,532) (58,521)
------------- ------------- -------------
Total extraordinary items 123,360 (626,448) (9,935)
------------- ------------- -------------
Net income (loss) $ 9,546,094 $ 22,556,310 $ (27,411)
============= ============= =============
Income (loss) before
extraordinary items allocated
to General Partner $ 39,922 $ 231,827 $ (175)
============= ============= =============
Income (loss) before
extraordinary items allocated
to Limited Partners $ 9,382,812 $ 22,950,931 $ (17,301)
============= ============= =============
Income (loss) before
extraordinary items per
Limited Partnership Interest
(59,092 issued and outstanding)
- Basic and Diluted $ 158.78 $ 388.39 $ (0.29)
============= ============= =============
Extraordinary items allocated
to General Partner $ 523 $ (6,264) $ (99)
============= ============= =============
Extraordinary items allocated
to Limited Partners $ 122,837 $ (620,184) $ (9,836)
============= ============= =============
Extraordinary items per Limited
Partnership Interest (59,092
issued and outstanding) -
Basic and Diluted $ 2.08 $ (10.50) $ (0.17)
============= ============= =============
Net income (loss) allocated to
General Partner $ 40,445 $ 225,563 $ (274)
============= ============= =============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
------------- ------------- ------------
Net income (loss) allocated to
Limited Partners $ 9,505,649 $ 22,330,747 $ (27,137)
============= ============= =============
Net income (loss) per Limited
Partnership Interest (59,092
issued and outstanding) -
Basic and Diluted $ 160.86 $ 377.90 $ (0.46)
============= ============= =============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------- ------------- -------------
Operating activities:
Net income (loss) $ 9,546,094 $ 22,556,310 $ (27,411)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Gains on sales
of properties (11,416,395) (19,528,414)
Debt extinguishment expense 775,635 440,081
Gain on forgiveness of
debt (1,350,000) (69,409)
Affiliate's participation
in debt extinguishment
expense (169,953) (7,165)
Affiliate's participation
in gain on forgiveness
of debt 337,500 20,823
Participation in debt
extinguishment expense 193,532 58,521
Affiliates' participation
in income (loss) from
joint ventures 1,606,722 1,144,318 (69,819)
Participation in (income)
loss of joint
venture with an
affiliate (4,875,091) 2,596
Depreciation of properties 505,448 1,373,849 1,747,385
Amortization of deferred
expenses 90,088 131,305 141,321
Net change in:
Escrow deposits 338,176 64,933 (29,146)
Accounts and accrued
interest receivable 34,518 (3,474) (84,005)
Prepaid expenses 59,888 301,752 (133,857)
Accounts payable (5,045) (57,074) (33,866)
Due to affiliates (56,131) 66,194 (44,815)
Security deposits (159,650) (174,817) 38,519
------------- ------------- -------------
Net cash provided by
operating activities 136,895 1,626,239 1,516,837
------------- ------------- -------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
------------- ------------- -------------
Investing activities:
Proceeds from sales of
properties 14,529,476 31,678,988
Payment of selling costs (899,132) (700,889)
Contributions to joint venture
with an affiliate (374,657)
Distributions from joint
ventures with affiliates 1,046,660 2,495,139 328,378
------------- ------------- -------------
Net cash provided by or (used
in) investing activities 14,677,004 33,473,238 (46,279)
------------- ------------- -------------
Financing activities:
Distributions to Limited
Partners $(10,283,190) $(13,591,160) $ (443,190)
Deemed distribution to
Limited Partners (595,459)
Distributions to joint venture
partners - affiliates (1,179,284) (1,399,775) (192,659)
Contributions from joint
venture partners - affiliates 62,932
Repayment of mortgage notes
payable (6,443,945) (16,731,937)
Release of capital improvement
escrows 358,178 639,000
Payment of deferred expenses (125,000)
Principal payments on mortgage
notes payable (143,959) (376,093) (489,850)
------------- ------------- -------------
Net cash used in financing
activities (18,287,659) (31,522,033) (1,125,699)
------------- ------------- -------------
Net change in cash and cash
equivalents (3,473,760) 3,577,444 344,859
Cash and cash equivalents at
beginning of year 5,888,040 2,310,596 1,965,737
------------- ------------- -------------
Cash and cash equivalents at
end of year $ 2,414,280 $ 5,888,040 $ 2,310,596
============= ============= =============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85-SERIES III
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (the
"Partnership") has retained cash reserves from the sale of its real estate
investments for contingencies which exists or may arise. The Partnership's
operations currently consist of interest income earned on short-term
investments and the payment of administrative expenses.
2. Partnership Termination:
The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Partnership sold three properties. In addition,
the property in which the Partnership held a minority joint venture interest
was sold. During 1997, the Partnership sold the Howell Station Apartments and
the Partnership's remaining real estate investment, the North Hill Apartments.
The Partnership has retained a portion of the cash from the property sales to
satisfy obligations of the Partnership, as well as establish a reserve for
contingencies. The timing of the termination of the Partnership and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees and costs stemming from litigation involving the Partnership
including, but not limited to, the lawsuits discussed in Note 14 of Notes to
Financial Statements. In the absence of any such contingency, the reserves will
be paid within twelve months of the last property being sold. In the event a
contingency continues to exist or arises, reserves may be held by the
Partnership for a longer period of time.
3. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally
accepted accounting principles requires the General Partner to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from those estimates.
(b) Depreciation expense was computed using the straight-line method. Rates
used in the determination of depreciation were based upon the following
estimated useful lives:
Buildings and improvements 30 years
Furniture and fixtures 5 years
Maintenance and repairs were charged to expense when incurred. Expenditures for
improvements were charged to the related asset account.
<PAGE>
As properties were sold, the related costs and accumulated depreciation were
removed from the respective accounts. Any gain or loss on disposition was
recognized in accordance with generally accepted accounting principles.
(c) Effective January 1, 1995 the Partnership adopted Statement of Financial
Accounting Standards, No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of". Under SFAS 121, the
Partnership recorded its investments in real estate at the lower of cost or
fair value, and periodically assessed, but not less than on an annual basis,
possible impairment to the value of its properties. The General Partner
estimated the fair value of its properties based on the current sales price
less estimated closing costs. Under SFAS 121, the General Partner determined
that no impairment in value had occurred prior to the sales of the properties.
The General Partner considered the method referred to above to result in a
reasonable measurement of a property's fair value, unless other factors
affecting the property's value indicated otherwise.
(d) Deferred expenses consisted of loan financing and modification fees which
were amortized over the terms of the respective agreements. Upon sale, any
remaining unamortized balance was recognized as debt extinguishment expense and
classified as an extraordinary item.
(e) The Financial Accounting Standard Board's Statement No. 107, "Disclosures
About Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
that value. Since quoted market prices are not available for the Partnership's
financial instruments, fair values have been based on estimates using present
value techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, may not be realized in
immediate settlement of the instrument. Statement No. 107 does not apply to all
balance sheet items and excludes certain financial instruments and all
non-financial instruments such as real estate and investment in joint ventures
from its disclosure requirements.
(f) For financial statement purposes, in previous years partners were allocated
income and loss in accordance with the provisions in the Partnership Agreement.
In order for the capital accounts of the General Partner and Limited Partners
to appropriately reflect their remaining economic interests as provided for in
the Partnership Agreement, income allocations between the partners have been
adjusted for financial statement purposes in 1997.
(g) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash is held or
invested in one financial institution.
(h) The Partnership is not liable for Federal income taxes and each partner
recognizes his proportionate share of the Partnership income or loss in his tax
return; therefore, no provision for income taxes is made in the financial
statements of the Partnership.
(i) Revenue was recognized on an accrual basis in accordance with generally
accepted accounting principles.
<PAGE>
(j) Investment in joint venture with an affiliate represented the Partnership's
40.25% interest, under the equity method of accounting, in a joint venture with
an affiliated partnership. Under the equity method of accounting, the
Partnership recorded its initial investment at cost and adjusted its investment
account for additional capital contributions, distributions and its share of
joint venture income or loss.
(k) Statement of Financial Accounting Standards, No. 128, "Earnings per Share"
was adopted by the Partnership for the year ended December 31, 1997 and has
been applied to all prior earnings periods presented in the financial
statements. Since the Partnership has no dilutive securities, there is no
difference between basic and diluted net income (loss) per Limited Partnership
Interest.
4. Partnership Agreement:
The Partnership was organized on October 25, 1984. The Partnership Agreement
provides for Balcor Partners-XVIII to be the General Partner and for the
admission of Limited Partners through the sale of up to 70,000 Limited
Partnership Interests at $1,000 per Interest, 59,092 of which were sold on or
prior to December 31, 1985, the termination date of the offering.
Pursuant to the Partnership Agreement, Partnership income and losses were to be
allocated 99% to the Limited Partners and 1% to the General Partner. For
financial statement purposes, in previous years partners were allocated income
and loss in accordance with the provisions in the Partnership Agreement. In
order for the capital accounts of the General Partner and Limited Partners to
appropriately reflect their remaining economic interests as provided for in the
Partnership Agreement, income allocations between the partners have been
adjusted for financial statement purposes in 1997.
Pursuant to the Partnership Agreement, one hundred percent of Net Cash Receipts
available for distribution was distributed to the holders of Interests in
proportion to their participating percentages as of the record date for such
distributions. In addition, there was accrued for the General Partner as its
distributive share from operations an amount equal to approximately 1% of the
total Net Cash Receipts being distributed which was to be paid only out of
distributed Net Cash Proceeds. The accrued amount was to be paid as a part of
the General Partner's share of distributed Net Cash Proceeds and was to be paid
only out of distributed Net Cash Proceeds in excess of total Original Capital
plus a 6% Cumulative Distribution. Under certain circumstances, the General
Partner may have participated in the Net Cash Proceeds of the sale or
refinancing of Partnership properties. The General Partner's participation was
limited to 15% of Net Cash Proceeds and was subordinated to the return of
Original Capital plus any deficiency in a Cumulative Distribution of 6% on
Adjusted Original Capital to the holders of Interests. The General Partner
will not receive any distributions of Net Cash Receipts or Net Cash Proceeds in
accordance with these provisions.
5. Mortgage Notes Payable:
As of December 31, 1996 the Partnership had mortgage notes payable of
$6,467,081 and $16,506,947 related to the Howell Station and North Hill
<PAGE>
apartment complexes, respectively. During 1997, the Howell Station Apartments
mortgage note was repaid in full in connection with the sale of the property
and the purchaser took title to the North Hill Apartments subject to the
mortgage note. See Note 11 of Notes to Financial Statements for additional
information.
The North Hill Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. In connection with the 1994 bond refinancing of
the North Hill Apartments, the joint venture was obligated under a $1,350,000
noninterest bearing note from an unaffiliated party, which was to be repaid
only to the extent that net sales proceeds exceeded a certain predetermined
level. The note was not collateralized by the North Hill Apartments. The net
proceeds received from the sale of the property did not meet the required
level. Therefore, the note was not repaid and has been forgiven.
During 1997, 1996 and 1995, the Partnership incurred interest expense on
mortgage notes payable of $1,109,915, $3,306,963 and $4,259,221 and paid
interest expense of $1,122,982, $3,306,963 and $4,259,221, respectively.
6. Management Agreements:
The Partnership's properties were under management agreements with a third
party management company prior to the sale of the properties. These management
agreements provided for annual fees of 5% of gross operating receipts.
7. Affiliates' Participation in Joint Ventures:
The North Hill and Shadowridge apartment complexes were owned by joint ventures
consisting of the Partnership and affiliated partnerships. The Shadowridge and
North Hill apartment complexes were sold in 1996 and 1997, respectively.
Profits and losses were allocated 75% to the Partnership and 25% to the
affiliate for North Hill Apartments, and 70% to the Partnership and 30% to the
affiliate for Shadowridge Apartments. All assets, liabilities, income and
expenses of the joint ventures were included in the financial statements of the
Partnership with the appropriate adjustment to profit or loss for each
affiliate's participation. Net distributions of $1,274,598, $1,336,843, and
$192,659 were made to joint venture partners during 1997, 1996, and 1995,
respectively. See Notes 11 and 12 of Notes to Financial Statements for
additional information.
8. Investment in Joint Venture with an Affiliate:
The Lakeville Resort Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. The Partnership and the affiliate held
participating percentages in the joint venture of 40.25% and 59.75%,
respectively. In October 1996, the joint venture sold the property in an all
cash sale for $27,200,000, and the purchaser took title subject to the existing
first mortgage loan in the amount of $20,795,872. From the proceeds of the
sale, the joint venture paid $355,000 in selling costs. The joint venture
recognized a gain of $11,761,791 from the sale of this property, of which
$4,734,121 was the Partnership's share. For financial statement purposes, the
Partnership's share of the gain is included in participation in income of joint
venture with affiliate in 1996. The following information has been summarized
from the December 31, 1996 financial statements of the joint venture:
<PAGE>
Total liabilities $ 201,250
Total income 3,487,495
Net loss before gain on sale
and extraordinary item (4,688,425)
Gain on sale 11,761,791
Extraordinary item:
Debt extinguishment expense 480,825
Net income 6,592,542
During 1995, the Partnership made net capital contributions to the joint
venture of $46,279. During 1996, the Partnership received distributions from
the joint venture for property operations of $261,615 and received a
distribution of $2,233,524 representing its share of net proceeds available for
distribution from the sale of the property. Pursuant to the sale agreement, the
joint venture was required to withhold $500,000 of the sale proceeds until
February 1997 at which time the funds were released in full. The Partnership's
share of the funds was $201,250. The Partnership also received a distribution
from the joint venture of $845,410 principally consisting of its share of
repair escrows released during 1997.
9. Tax Accounting:
The Partnership keeps its books in accordance with the Internal Revenue Code,
rules and regulations promulgated thereunder and existing interpretations
thereof. The accompanying financial statements, which are prepared in
accordance with generally accepted accounting principles, will differ from the
tax returns due to the different treatment of various items as specified in the
Internal Revenue Code. The net effect of these accounting differences is that
the net income for 1997 in the financial statements is $6,899,955 less than the
tax income of the Partnership for the same period.
10. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended
12/31/97 12/31/96 12/31/95
-------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ ------- ------ ------- ------ -------
Reimbursement of expenses
to the General Partner,
at cost:
Accounting $31,829 $6,337 $14,290 $14,417 $40,855 $2,792
Data processing 9,288 4,488 5,166 2,397 26,055 2,074
Investor communica-
tions None None None None 4,926 None
Legal 20,483 6,950 11,001 11,098 19,064 2,828
Portfolio management 70,510 10,566 38,243 38,580 81,974 11,039
Property sales
administration 70,769 1,032 18,846 19,012 3,006 577
Other None None None None 5,665 None
<PAGE>
The Partnership participated in an insurance deductible program with other
affiliated partnerships in which the program paid claims up to the amount of
the deductible under the master insurance policies for its properties. The
program was administered by an affiliate of the General Partner which received
no fee for administering the program; however, the General Partner was
reimbursed for program expenses. The Partnership paid premiums to the
deductible insurance program of $16,999 and $82,931 for 1996 and 1995,
respectively.
11. Property Sales:
(a) In May 1997, the Partnership sold the Howell Station Apartments in an all
cash sale for $10,000,000. From the proceeds of the sale, the Partnership paid
$6,443,945 to the third party mortgage holder in full satisfaction of the first
mortgage loan, $283,458 of prepayment penalties and $272,478 in selling costs.
In addition, the Partnership paid a state withholding tax of $214,203 on behalf
of the Limited Partners relating to the gain on sale of the property which has
been recorded as a deemed distribution for financial statement purposes. The
basis of the property was $4,881,076, which is net of accumulated depreciation
of $3,209,515. For financial statement purposes, the Partnership recognized a
gain of $4,846,446 from the sale of this property.
(b) The North Hill Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. The Partnership and the affiliate held
participating percentages in the joint venture of 75% and 25%, respectively. In
September 1997, the joint venture sold the property for a sales price of
$21,000,000. The purchaser of the property took title subject to the existing
first mortgage loan in the amount of $16,470,524, which represents a noncash
transaction to the Partnership. Accordingly, the noncash aspect of this
transaction is not presented in the Partnership's Statements of Cash Flows.
From the proceeds of the sale, the joint venture paid $164,705 in fees relating
to the assumption of the mortgage loan by the purchaser and $461,949 in selling
costs. In addition, a state withholding tax of $381,256 was paid relating to
the gain on sale of the property which has been recorded as a deemed
distribution for financial statement purposes, of which $95,314 was the
minority joint venture partner's share. The basis of the property was
$13,803,397, which is net of accumulated depreciation of $9,035,587. For
financial statement purposes, the joint venture recognized a gain of $6,569,949
from the sale of this property, of which $1,642,542 is the minority joint
venture partner's share.
(c) In June 1996, the Partnership sold the Country Ridge Apartments in an all
cash sale for $15,950,000. From the proceeds of the sale, the Partnership paid
$8,770,310 to the third party mortgage holder in full satisfaction of the first
mortgage loan, and paid $134,625 in selling costs. The basis of the property
was $6,741,814, which is net of accumulated depreciation of $3,705,963. For
financial statement purposes, the Partnership recognized a gain of $9,073,561
from the sale of this property.
(d) The Shadowridge Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. The Partnership and the affiliate held
participating percentages in the joint venture of 70% and 30%, respectively. In
August 1996, the joint venture sold the property in an all cash sale for
<PAGE>
$12,600,000. From the proceeds of the sale, the joint venture paid $7,961,627
to the third party mortgage holder in full satisfaction of the first mortgage
loan, and paid $384,545 in selling costs. The basis of the property was
$8,151,131, which is net of accumulated depreciation of $4,406,663. For
financial statement purposes, the Partnership recognized a gain of $4,064,324
from the sale of this property, of which $1,219,297 is the minority joint
venture partner's share.
(e) In September 1996, the Partnership sold the Park Place Apartments - Phase
II in an all cash sale for $12,125,000. The purchaser of the property took
title subject to the existing first mortgage loan in the amount of $8,996,012
which represents a noncash transaction to the Partnership. Accordingly, the
noncash aspect of this transaction is not presented in the Partnership's
Statements of Cash Flows. From the proceeds of the sale, the Partnership paid
$181,719 in selling costs. The basis of the property was $5,552,752, which is
net of accumulated depreciation of $3,932,895. For financial statement
purposes, the Partnership recognized a gain of $6,390,529 from the sale of this
property.
12. Extraordinary Items:
(a) In connection with the sale of the Howell Station Apartments during 1997,
the Partnership wrote off the remaining unamortized financing fees of $95,822
and paid a prepayment penalty of $283,458. In connection with the sale of the
North Hill Apartments during 1997, the joint venture that owned the property
wrote off the remaining unamortized deferred financing fees of $617,919, of
which $154,480 represents the North Hill Apartments minority joint venture
partner's share. Additionally, in connection with the 1994 bond refinancing of
the North Hill Apartments, the joint venture paid a bond discount fee of
$84,400 which was recorded as a reduction of the underlying mortgage balance.
In connection with the 1997 sale of the property, the remaining unamortized
balance of the discount fee of $61,894 was written off. The minority joint
venture partner's share of this amount was $15,473. These amounts were
recognized as debt extinguishment expense and classified as extraordinary items
for financial statement purposes.
(b) In connection with the 1994 bond refinancing of the North Hill Apartments,
the joint venture was obligated under a $1,350,000 non-interest bearing note
from an unaffiliated party, which was to be repaid only to the extent that net
sales proceeds exceeded a certain predetermined level. The net proceeds
received from the sale of the property did not meet the required level.
Therefore, the note was not repaid and has been forgiven, which resulted in an
extraordinary gain on forgiveness of debt of $1,350,000 for financial statement
purposes, of which $337,500 represents the minority joint venture partner's
share.
(c) In connection with the sales of the Country Ridge, Shadowridge and Park
Place - Phase II apartment complexes during 1996, the Partnership wrote off the
remaining unamortized deferred expenses in the amount of $440,081. This amount
was recognized as an extraordinary item and classified as debt extinguishment
expense, of which $7,165 represents the Shadowridge Apartments minority joint
venture partner's share.
<PAGE>
(d) The Partnership owned a minority joint venture interest in Lakeville Resort
Apartments. In connection with the sale during October 1996, the joint venture
wrote off the remaining unamortized deferred expenses. These amounts were
recognized as an extraordinary item and classified as debt extinguishment
expense. The Partnership's share of the extraordinary item was $193,532.
(e) Shadowridge Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. During 1995, the joint venture recognized an
extraordinary gain on forgiveness of debt of $69,409 in connection with a
settlement reached with the seller, of which $20,823 represents the affiliate's
share.
(f) The Partnership owned a minority joint venture interest in Lakeville Resort
Apartments. In June 1995, the mortgage note was refinanced with a new lender.
In connection with this transaction, the Partnership recognized it's share of
the write off of unamortized deferred expenses of $58,521.
13. Fair Value of Financial Instruments:
The carrying amounts and fair values of the Partnership's financial instruments
at December 31, 1997 and 1996 are as follows:
The carrying value of cash and cash equivalents, accounts and accrued interest
receivable and accounts payable approximates fair value.
Mortgage Notes Payable: Based on borrowing rates available to the Partnership
at the end of 1996 for mortgage loans with similar terms and maturities, the
fair value of the mortgage notes payable approximated the carrying value.
14. Contingencies:
The Partnership is currently involved in two lawsuits whereby the Partnership
and certain affiliates have been named as defendants alleging substantially
similar claims involving certain state securities and common law violations
with regard to the property acquisition process of the Partnership, and to the
adequacy and accuracy of disclosures of information concerning, as well as
marketing efforts related to, the offering of the Limited Partnership Interests
of the Partnership. The defendants continue to vigorously contest these
actions. A plaintiff class has not been certified in either action and, no
determinations of the merits have been made. It is not determinable at this
time whether or not an unfavorable decision in either action would have a
material adverse impact on the financial position, operations and liquidity of
the Partnership. The Partnership believes it has meritorious defenses to
contest the claims.
15. Subsequent Event:
In January 1998, the Partnership made a distribution of $719,778 ($12.18 per
Interest) to the holders of Limited Partnership Interests, representing
remaining available Net Cash Receipts reserves of $7.25 per Interest and
available Net Cash Proceeds of $4.93 per Interest, from the Partnership's share
of the sale holdback on North Hill Apartments.
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2414
<SECURITIES> 0
<RECEIVABLES> 59
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2473
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2473
<CURRENT-LIABILITIES> 63
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2410
<TOTAL-LIABILITY-AND-EQUITY> 2473
<SALES> 0
<TOTAL-REVENUES> 12954
<CGS> 0
<TOTAL-COSTS> 1430
<OTHER-EXPENSES> 991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1110
<INCOME-PRETAX> 9423
<INCOME-TAX> 0
<INCOME-CONTINUING> 9423
<DISCONTINUED> 0
<EXTRAORDINARY> 123
<CHANGES> 0
<NET-INCOME> 9546
<EPS-PRIMARY> 160.86
<EPS-DILUTED> 160.86
</TABLE>
