Item 1. Business - ----------------
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 its interests in real estate. The Registrant sold its final real estate investment in September 1997. The Registrant has retained a portion of the cash from the property sales to satisfy obligations of the Registrant, as well as to establish a reserve for contingencies. The timing of the termination of the Registrant and final distribution of cash will depend upon the nature and extent of liabilities and contingencies which exist or may arise. Such contingencies may include legal and other fees and costs stemming from litigation involving the Registrant including, but not limited to, the Bruss and Masri lawsuits discussed in "Item 3. Legal Proceedings". Due to this litigation, the Registrant will not be dissolved and reserves will be held by the Registrant until the conclusion of such contingencies. There can be no assurances as to the time frame for conclusion of all contingencies.
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.
Item 2. Properties - ------------------
As of December 31, 1999, the Registrant did not own any properties.
In the opinion of the General Partner, the Registrant has obtained adequate insurance coverage for property liability and property damage matters.
See Notes to Financial Statements for other information regarding former real estate property investments.
Item 3.
Item 3. Legal Proceedings - -------------------------
Bruss et al. vs. Lehman Brothers, Inc., et al. - ---------------------------------------------- On January 25, 1999, a proposed class action complaint was filed, Dorothy Bruss, et al. vs. Lehman Brothers, Inc., et al. (Superior Court of New Jersey, Law Division, Essex County, Docket No. L-000898-99). The Partnership, ten additional limited partnerships which were sponsored by The Balcor Company (together with the Partnership, the "Affiliated Partnerships"), The Balcor Company, American Express Company, Lehman Brothers, Inc., Smith Barney, Inc., American Express Financial Corporation, and other affiliated entities and 9 individuals were named defendants in the action. Lead counsel representing the plaintiffs in this case is the same counsel representing the plaintiffs in each of the Lenore Klein case (now dismissed) and Raymond Masri case (see below). The Bruss complaint raises largely the same issues as those raised in the Lenore Klein and the Raymond Masri cases.
Upon the defendants' Motion to Dismiss, the Bruss complaint was dismissed without prejudice on September 24, 1999. An amended complaint was filed on November 30, 1999. The amended complaint differs from the original complaint in that 8 of the 9 individual defendants and American Express Company were deleted as defendants; the amended complaint also deletes 4 counts for breach of fiduciary duty, breach of contract, conspiracy and violations of the New Jersey RICO statute and similar statutes of other states. The amended complaint alleges, common law fraud, equitable fraud, negligent misrepresentation and violation of certain New Jersey and other similar state statutes relating to the disclosure of information in the offering of limited partnership interests in the Affiliated Partnerships, the marketing of interests in the Affiliated Partnerships and the acquisition of real property for the Affiliated Partner- ships. The complaint seeks judgement 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; recovery from the Defendants of all profits received by them as a result of their alleged actions relating to the Affiliated Partnerships; and attorneys' fees and other costs.
The defendants filed a new Motion to Dismiss on January 31, 2000. The defendants intend to vigorously contest this action. No class has been certified as of this date. Management of each of the defendants believes that it has meritorious defenses to contest the claims.
Raymond Masri vs. Lehman Brothers, Inc., et al. - -----------------------------------------------
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 Partnership, twelve additional limited partnerships which were sponsored by The Balcor Company, three limited partnerships sponsored by the predecessor of Lehman Brothers, Inc., (together with the Partnership, 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. Management of each of the defendants believes they have meritorious defenses to contest the claims.
No activity occurred on this matter during 1999. Plaintiffs' counsel also represents the plaintiffs in the Dorothy Bruss matter, which is based on the same set of facts. Raymond Masri is named as an additional plaintiff in the Dorothy Bruss matter.
Madison Partnership Liquidity Investors XX, et al. vs. The Balcor Company, et - ----------------------------------------------------------------------------- al. - --- Sandra Dee vs. The Balcor Company, et al. - -----------------------------------------
On May 7, 1999, a proposed class action complaint was filed and on May 13, 1999 was served on the defendants, Madison Partnership Liquidity Investors XX, et al. vs. The Balcor Company, et al. (Circuit Court, Chancery Division, Cook County, Illinois, Docket No. 99CH 08972). The General Partner of the Partnership, the general partners of twenty-one additional limited partnerships which were sponsored by The Balcor Company, The Balcor Company and one individual are named as defendants in this action. The Partnership and the twenty-one additional limited partnerships are referred to herein as the "Affiliated Partnerships". Plaintiffs are entities that initiated tender offers to purchase units and, in fact, purchased units in eleven of the Affiliated Partnerships.
On June 1, 1999, a proposed class action complaint was filed and on August 16, 1999 was served on the defendants, Sandra Dee vs. The Balcor Company, et al. (Circuit Court, Chancery Division, Cook County, Illinois, Docket No. 99CH 08123). This complaint is identical in all material respects to the Madison Partnership Liquidity Investors XX, et al. vs. The Balcor Company et al. complaint filed in May 1999. The defendants filed on September 15, 1999 a motion to consolidate the Dee case with the Madison Partnership case. On September 20, 1999, the motion was granted and this case was consolidated with the Madison Partnership case.
The complaints allege breach of fiduciary duties and breach of contract under the partnership agreements for each of the Affiliated Partnerships. The complaints seek the winding up of the affairs of the Affiliated Partnerships, the establishment of a liquidating trust for each of the Affiliated Partnerships until a resolution of all contingencies occurs, the appointment of an independent trustee for each such liquidating trust and the distribution of a portion of the cash reserves to limited partners. The complaints also seek compensatory damages, punitive and exemplary damages, and costs and expenses in pursuing the litigation.
The defendants filed motions to dismiss the complaints on July 14, 1999 and on September 15, 1999. On January 19, 2000 a hearing on the motions was held and the class allegations in the complaints were struck regarding the Partnership and ten of the Affiliated Partnerships in which plaintiffs do not own
interests. In all other respects, the motions to dismiss were denied. While the court directed the plaintiffs to file an amended complaint by February 18, 2000, as of this date they have yet to do so.
The defendants intend to vigorously contest this action. No class has been certified as of this date.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - -----------------------------------------------------------
No matters were submitted to a vote of the Limited Partners of the Registrant during 1999.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------------------------------------------------------------------------- Matters - -------
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, 1999, the number of record holders of Limited Partnership Interests of the Registrant was 4,779.
Item 6.
Item 6. Selected Financial Data - -------------------------------
Year ended December 31, ---------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ----------- -----------
Total income $79,216 $94,015 $3,144,396 $14,299,834 $12,057,899 (Loss) income before gain on sales, affiliates' participation in joint ventures and extraordinary items (66,558) (115,364) (386,939) 4,798,662 (87,295) Net (loss) income (66,558) (115,364) 9,546,094 22,556,310 (27,411) Net (loss) income per Limited Partnership Interest - Basic and Diluted (1.13) (1.95) 160.86 377.90 (.46) Total assets 1,613,805 1,653,365 2,472,953 27,755,377 45,259,656 Mortgage notes payable None None None 24,324,028 50,428,070 Distributions per Limited Part- nership Interest (A) None 12.18 174.02 230.00 7.50
(A) These amounts include distributions of original capital of $4.93, $159.02 and $200.00 per Limited Partnership Interest for 1998, 1997 and 1996, respectively.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and - ----------------------------------------------------------------------- Results of Operations - ---------------------
Operations - ----------
Summary of Operations
- ---------------------
The operations of Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (the "Partnership") in 1999 and 1998 consisted primarily of administrative expenses which were partially offset by interest income earned on short-term investments. Primarily as a result of lower administrative expenses in 1999, the Partnership's net loss decreased during 1999 as compared to 1998. The Partnership sold its two remaining properties in 1997 and recognized gains in connection with these property sales. As a result, the Partnership recognized net income during 1997 as compared to a net loss during 1998. Further discussion of the Partnership's operations is summarized below.
1999 Compared to 1998 - ---------------------
As a result of lower interest rates in 1999 and higher average cash balances in 1998 prior to a distribution to Limited Partners in January 1998, interest income on short-term investments decreased during 1999 as compared to 1998.
During 1998, the Partnership received a refund of state income taxes relating to the gain on the sale of the Country Ridge Apartments which was sold in 1996. This amount was recognized as other income for financial statement purposes.
During 1998, the Partnership paid its share of property operating expenses relating to the North Hill Apartments, in which the Partnership held a joint venture interest. The property was sold in 1997.
Primarily due to a decrease in accounting and accrued legal fees, administrative expenses decreased during 1999 as compared to 1998.
1998 Compared to 1997 - ---------------------
The Partnership sold the Howell Station and North Hill apartment complexes during 1997 and recognized gains of $6,569,949 and $4,846,446, respectively, in connection with these sales. As a result, rental and service income, interest expense on mortgage notes payable, depreciation, amortization, real estate taxes and property management fees ceased during 1997.
Due to higher average cash balances in 1997 as a result of the investment of proceeds received in connection with the property sales prior to distribution to Limited Partners, interest income on short-term investments decreased during 1998 as compared to 1997.
The Partnership recognized other income during 1997 primarily in connection with a partial refund of prior years' insurance premiums relating to the Partnership's properties.
Property operating expense decreased during 1998 as compared to 1997 due to the sales of the Partnership's two remaining properties in 1997.
Due primarily to lower accounting, data processing and portfolio management fees as a result of prior years' property sales, administrative expenses decreased during 1998 as compared to 1997.
The North Hill Apartments was owned by a joint venture consisting of the Partnership and an affiliate. Due to the sale of this property in 1997, affiliate's participation in income from joint venture ceased during 1997.
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 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 sale of the property, the remaining unamortized balance of a bond discount fee of $61,894 was written off, of which $15,473 was the 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 1997 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.
Liquidity and Capital Resources - -------------------------------
The cash position of the Partnership decreased by approximately $40,000 as of December 31, 1999 as compared to December 31, 1998 due to cash used in operating activities for the payment of administrative expenses, which was partially offset by interest income earned on short-term investments.
The Partnership Agreement provides for the dissolution of the Partnership upon the occurrence of certain events, including the disposition of all its interests in real estate. The Partnership sold its final real estate investment in September 1997. The Partnership has retained a portion of the cash from the property sales to satisfy obligations of the Partnership, as well as to establish a reserve for contingencies. The timing of the termination of the Partnership and final distribution of cash will depend upon the nature and extent of liabilities and contingencies which exist or may arise. Such contingencies may include legal and other fees and costs stemming from litigation involving the Partnership including, but not limited to, the Bruss and Masri lawsuits discussed in "Item 3. Legal Proceedings". Due to this litigation, the Partnership will not be dissolved and reserves will be held by the Partnership until the conclusion of such contingencies. There can be no assurances as to the time frame for the conclusion of all contingencies.
The Partnership made distributions in 1998 and 1997 totaling $12.18 and $174.02 per Limited Partnership Interest, respectively. No distributions were made in 1999. See Statements of Partners' Capital for additional information. Distributions were comprised of $7.25 per Interest of Net Cash Receipts and $4.93 per Interest of Net Cash Proceeds in 1998 and $15.00 per Interest of Net Cash Receipts and $159.02 per Interest of Net Cash Proceeds in 1997.
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.
The Partnership believes that its key vendors were Year 2000 compliant with respect to the Partnership's operations as of December 31, 1999 and that there was no material effect on the business, financial position or results of operations of the Partnership related to Year 2000 issues.
Certain statements in this report constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may include statements regarding income or losses as well as assumptions relating to the foregoing.
The forward-looking statements made by the Partnership are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Partnership to differ from any future results, performance or achievements expressed or implied by the forward-looking statements.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------
The supplemental financial information specified by Item 305 of Regulation S-K is not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K is not applicable.
The net effect of the differences between the financial statements and the tax returns is summarized as follows:
December 31, 1999 December 31, 1998 ---------------------- ----------------------- Financial Tax Financial Tax Statements Returns Statements Returns ----------- --------- ----------- --------
Total assets $1,613,805 $8,128,407 $1,653,365 $8,167,967 Partners' Capital (deficit) accounts: General Partner (308,517) (307,663) (308,517) (307,663) Limited Partners 1,816,436 8,330,445 1,882,994 8,397,003 Net (loss) income: General Partner None None None 854 Limited Partners (66,558) (66,558) (115,364) (130,236) Per Limited Part- nership Interest (1.13)(A) (1.13) (1.95)(A) (2.20)
(A) Amount represents basic and diluted net loss per Limited Partnership Interest.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure - --------------------
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.
Item 10. Directors and Executive Officers of the Registrant - -----------------------------------------------------------
(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 Managing Director, Chief Jayne A. Kosik Financial Officer, Treasurer and Assistant Secretary
Thomas E. Meador (age 52) 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.
Mr. Meador is on the Board of Directors of AMLI Commercial Properties Trust, a private real estate investment trust that owns office and industrial buildings in the Chicago, Illinois area. Mr. Meador was elected to the Board of AMLI Commercial Properties Trust in August 1998.
Jayne A. Kosik (age 42) joined Balcor in August 1982 and, as Chief Financial Officer, is responsible for Balcor's financial, human resources and treasury functions. Ms. Kosik is also a member of the board of directors of The Balcor Company. From June 1989 until October 1996, Ms. Kosik had supervisory responsibility for accounting functions relating to Balcor's public and private partnerships. She is also Treasurer and a Senior Managing Director of The Balcor Company. Ms. Kosik is a Certified Public Accountant.
(d) There is no family relationship between any of the foregoing officers.
(f) None of the foregoing officers or employees are currently involved in any material legal proceedings nor were any such proceedings terminated during the fourth quarter of 1999 except that Mr. Meador is named, in his capacity as an officer of Balcor, as a defendant in the Madison/Dee lawsuit described in "Item 3. Legal Proceedings".
Item 11.
Item 11. Executive Compensation - -------------------------------
The Registrant has not paid and does not propose to pay any remuneration to the executive officers and directors of the General Partner. The executive officers
receive compensation from The Balcor Company (but not from the Registrant) for services performed for various affiliated entities, which may include services performed for the Registrant. However, the General Partner believes that any such compensation attributable to services performed for the Registrant is immaterial to the Registrant. See Note 9 of Notes to Financial Statements for information relating to transactions with affiliates.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -----------------------------------------------------------------------
(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 -------------- ------------- ---------------- Limited Partnership Interests None None
As of December 31, 1999 the relatives of the officers and affiliates of the partners of the General Partner owned 128 Interests.
In addition, Balcor LP Corp., an affiliate of the General Partner, holds title to 60 Limited Partnership Interests in the Partnership due exclusively to instances in which Limited Partners abandoned title to their Limited Partnership Interests. Balcor LP Corp. is a nominee holder only of such Interests and has disclaimed any economic or beneficial ownership in said Interests. All distributions of cash payable with respect to such Interests held by Balcor LP Corp. are returned to the Partnership for distribution to other Limited Partners in accordance with the Partnership Agreement.
(c) The Registrant is not aware of any arrangements, the operation of which may result in a change of control of the Registrant.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------
(a & b) See Note 4 of Notes to Financial Statements for information relating to the Partnership Agreement and the allocation of distributions and profits and losses.
See Note 9 of Notes to Financial Statements for 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.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------
(a) (1 & 2) See Index to Financial Statements in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement 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.
(27) Financial Data Schedule of the Registrant for 1999 is attached hereto.
(b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter ended December 31, 1999.
(c) Exhibits: See Item 14(a)(3) above.
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 and Financial Officer) of Balcor Partners-XVIII, the General Partner
Date: March 28, 2000 --------------
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 28, 2000 - ------------------- -------------- Thomas E. Meador
Senior Managing Director and Chief Financial Officer (Principal Accounting and Financial Officer) of Balcor Partners-XVIII, the General Partner /s/Jayne A. Kosik March 28, 2000 - ----------------- -------------- Jayne A. Kosik
Report of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1999 and 1998
Statements of Partners' Capital (Deficit), for the years ended December 31, 1999, 1998 and 1997
Statements of Income and Expenses, for the years ended December 31, 1999, 1998 and 1997
Statements of Cash Flows, for the years ended December 31, 1999, 1998 and 1997
Notes to Financial Statements
Financial Statement Schedules are omitted for the reason that they are inapplicable or equivalent information has been included elsewhere herein.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Balcor Realty Investors 85-Series III A Real Estate Limited Partnership
In our opinion, the accompanying balance sheets and the related statements of partners' capital (deficit), of income and expenses and of cash flows present fairly, in all material respects, the financial position of Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (An Illinois Limited Partnership, "the Partnership") at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As described in Note 2 to the financial statements, the partnership agreement provides for the dissolution of the Partnership upon the occurrence of certain events, including the disposition of all its interests in real estate. The Partnership no longer has an ownership interest in any real estate investment. As described in Note 13, the Partnership has contingencies related to litigation. Upon resolution of the litigation contingency matters, the Partnership intends to cease operations and dissolve.
PricewaterhouseCoopers LLP
Chicago, Illinois March 28, 2000
BALCOR REALTY INVESTORS 85 - SERIES III A REAL ESTATE LIMITED PARTNERSHIP (AN ILLINOIS LIMITED PARTNERSHIP)
BALANCE SHEETS December 31, 1999 and 1998
ASSETS
1999 1998 ------------ ------------- Cash and cash equivalents $ 1,605,903 $ 1,646,332 Accounts and accrued interest receivable 7,902 7,033 ------------ ------------- $ 1,613,805 $ 1,653,365 ============ =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 74,305 $ 57,724 Due to affiliates 31,581 21,164 ------------ ------------- Total liabilities 105,886 78,888 ------------ ------------- Commitments and contingencies
Limited Partners' capital (59,092 Limited Partnership Interests issued and outstanding) 1,816,436 1,882,994 General Partner's deficit (308,517) (308,517) ------------ ------------- Total partners' capital 1,507,919 1,574,477 ------------ ------------- $ 1,613,805 $ 1,653,365 ============ =============
The accompanying notes are an integral part of the financial statements.
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, 1999, 1998 and 1997
Partners' Capital (Deficit) Accounts ------------------------------------------ General Limited Total Partner Partners ------------ ------------ ------------ 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
Cash distributions to Limited Partners (A) (719,778) (719,778) Net loss for the year ended December 31, 1998 (115,364) (115,364) ------------ ------------ ------------ Balance at December 31, 1998 1,574,477 (308,517) 1,882,994
Net loss for the year ended December 31, 1999 (66,558) (66,558) ------------ ------------ ------------ Balance at December 31, 1999 $ 1,507,919 $ (308,517) $ 1,816,436 ============ ============ ============
(A) Summary of cash distributions paid per Limited Partnership Interest:
1999 1998 1997 ------------ ------------ ------------ First Quarter None $ 12.18 $ 74.50 Second Quarter None None 11.52 Third Quarter None None 50.00 Fourth Quarter None None 38.00
(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.
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, 1999, 1998 and 1997
1999 1998 1997 ------------ ------------ ------------ Income: Rental and service $ 2,895,058 Interest on short-term investments $ 79,216 $ 86,043 223,352 Other 7,972 25,986 ------------ ------------ ------------ Total income 79,216 94,015 3,144,396 ------------ ------------ ------------ Expenses: Interest on mortgage notes payable 1,109,915 Depreciation 505,448 Amortization of deferred expenses 90,088 Property operating 17,455 1,023,498 Real estate taxes 259,058 Property management fees 147,902 Administrative 145,774 191,924 395,426 ------------ ------------ ------------ Total expenses 145,774 209,379 3,531,335 ------------ ------------ ------------ Loss before gain on sales, affiliates' participation in joint ventures and extraordinary items (66,558) (115,364) (386,939) Gain on sales of properties 11,416,395 Affiliates' participation in income from joint ventures before extraordinary items (1,606,722) ------------ ------------ ------------ (Loss) income before extraordinary items (66,558) (115,364) 9,422,734 ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements.
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, 1999, 1998 and 1997 (Continued)
1999 1998 1997 ------------ ------------ ------------ Extraordinary items: Debt extinguishment expense (1,059,093) Affiliate's participation in in debt extinguishment expense 169,953 Gain on forgiveness of debt 1,350,000 Affiliate's participation in gain on forgiveness of debt (337,500) ------------ Total extraordinary items 123,360 ------------ ------------ ------------ Net (loss) income $ (66,558) $ (115,364) $ 9,546,094 ============ ============ ============ (Loss) income before extraordinary items allocated to General Partner None None $ 39,922 ============ ============ ============ (Loss) income before extraordinary items allocated to Limited Partners $ (66,558) $ (115,364) $ 9,382,812 ============ ============ ============ (Loss) income before extraordinary items per Limited Partnership Interest (59,092 issued and outstanding) - Basic and Diluted $ (1.13) $ (1.95) $ 158.78 ============ ============ ============ Extraordinary items allocated to General Partner None None $ 523 ============ ============ ============ Extraordinary items allocated to Limited Partners None None $ 122,837 ============ ============ ============ Extraordinary items per Limited Partnership Interest (59,092 issued and outstanding) - Basic and Diluted None None $ 2.08 ============ ============ ============
The accompanying notes are an integral part of the financial statements.
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, 1999, 1998 and 1997 (Continued)
1999 1998 1997 ------------ ------------ ------------ Net (loss) income allocated to General Partner None None $ 40,445 ============ ============ ============ Net (loss) income allocated to Limited Partners $ (66,558) $ (115,364) $ 9,505,649 ============ ============ ============ Net (loss) income per Limited Partnership Interest (59,092 issued and outstanding) - Basic and Diluted $ (1.13) $ (1.95) $ 160.86 ============ ============ ============
The accompanying notes are an integral part of the financial statements.
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, 1999, 1998 and 1997
1999 1998 1997 ------------ ------------ ------------ Operating activities: Net (loss) income $ (66,558) $ (115,364) $ 9,546,094 Adjustments to reconcile net (loss) income to net cash (used in) or provided by operating activities: Gain on sales of properties (11,416,395) Debt extinguishment expense 775,635 Gain on forgiveness of debt (1,350,000) Affiliate's participation in debt extinguishment expense (169,953) Affiliate's participation in gain on forgiveness of debt 337,500 Affiliates' participation in income from joint ventures 1,606,722 Depreciation of properties 505,448 Amortization of deferred expenses 90,088 Net change in: Escrow deposits 338,176 Accounts and accrued interest receivable (869) 51,640 34,518 Prepaid expenses 59,888 Accounts payable 16,581 23,763 (5,045) Due to affiliates 10,417 (8,209) (56,131) Security deposits (159,650) ------------ ------------ ------------ Net cash (used in) or provided by operating activities (40,429) (48,170) 136,895 ------------ ------------ ------------
The accompanying notes are an integral part of the financial statements.
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, 1999, 1998 and 1997 (Continued)
1999 1998 1997 ------------ ------------ ------------ Investing activities: Proceeds from sales of properties $14,529,476 Payment of selling costs (899,132) Distributions from joint ventures with affiliates 1,046,660 ------------ Net cash provided by investing activities 14,677,004 ------------ Financing activities: Distributions to Limited Partners $ (719,778) (10,283,190) Deemed distribution to Limited Partners (595,459) Distributions to joint venture partners - affiliates (1,179,284) Repayment of mortgage notes payable (6,443,945) Release of capital improvement escrows 358,178 Principal payments on mortgage notes payable (143,959) ------------ ------------ Net cash used in financing activities (719,778) (18,287,659) ------------ ------------ Net change in cash and cash equivalents $ (40,429) (767,948) (3,473,760) Cash and cash equivalents at beginning of year 1,646,332 2,414,280 5,888,040 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 1,605,903 $ 1,646,332 $ 2,414,280 ============ ============ ============
The accompanying notes are an integral part of the financial statements.
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 its interests in real estate. The Partnership sold its final real estate investment in September 1997. The Partnership has retained a portion of the cash from the property sales to satisfy obligations of the Partnership, as well as to establish a reserve for contingencies. The timing of the termination of the Partnership and final distribution of cash will depend upon the nature and extent of liabilities and contingencies which exist or may arise. Such contingencies may include legal and other fees and costs stemming from litigation involving the Partnership including, but not limited to, the Bruss and Masri lawsuits discussed in Note 13 of Notes to the Financial Statements. Due to this litigation, the Partnership will not be dissolved and reserves will be held by the Partnership until the conclusion of such contingencies. There can be no assurances as to the time frame for the conclusion of all contingencies.
3. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates.
(b) 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.
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) 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. 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 Partnership calculates the fair value of its financial instruments based on estimates using present value techniques. The Partnership includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. When the fair value reasonably approximates the carrying value, no additional disclosure is made.
(f) In order for the capital account balances to appropriately reflect the partners' remaining economic interests in the Partnership Agreement, the income (loss) allocations have been adjusted.
(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 is recognized on an accrual basis in accordance with generally accepted accounting principles.
(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 effective for the year-ended December 31, 1997. 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. In order for the capital account balances to appropriately reflect the partners' remaining economic interests in the Partnership Agreement, the income (loss) allocations have been adjusted.
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. Under certain circumstances, the General Partner would have participated in the Net Cash Proceeds of the sale or refinancing of Partnership properties. Since the required subordination levels were not met, the General Partner has not received any distributions of Net Cash Receipts or Net Cash Proceeds during the lifetime of the Partnership.
5. Mortgage Notes Payable:
During 1997, the Partnership incurred interest expense on mortgage notes payable of $1,109,915 and paid interest expense of $1,122,982.
6. Management Agreements:
The Partnership's properties were managed by 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 Apartments was owned by a joint venture consisting of the Partnership and an affiliated partnership. The North Hill Apartments was sold in 1997. Profits and losses were allocated 75% to the Partnership and 25% to the affiliate. All assets, liabilities, income and expenses of the joint venture were included in the financial statements of the Partnership with the appropriate adjustment to profit or loss for the affiliate's participation. Net distributions of $1,274,598 were made to the joint venture partner during 1997. See Notes 10 and 11 of Notes to Financial Statements for additional information.
8. 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, differed in prior years from the tax returns due to the different treatment of various items as specified in the Internal Revenue Code. The net loss for 1999 in the financial statements is equal to the tax loss of the Partnership for the same period.
9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended 12/31/99 12/31/98 12/31/97 -------------- -------------- ------------- Paid Payable Paid Payable Paid Payable ----- ------- ----- ------- ----- ------- Reimbursement of expenses to the General Partner, at cost: Accounting $7,726 $7,071 $6,029 $4,081 $31,829 $6,337 Data processing 4,798 8,192 2,328 872 3,991 1,456 Legal 3,083 4,284 4,417 3,001 20,483 6,950 Portfolio management 11,690 12,034 19,347 13,210 75,807 13,598 Property sales administration None None 1,032 None 70,769 1,032
Subject to the provisions of the partnership agreement, the Partnership has agreed to advance the legal fees incurred by the General Partner in defending the Madison Partnership lawsuit discussed in Note 13 of Notes to Financial Statements.
10. 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.
11. 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 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 extraordinary items and classified as debt extinguishment expense 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.
12. Other Income:
The Partnership recognized other income during 1998 in connection with a refund of state income taxes relating to the gain on the 1996 sale of the Country Ridge Apartments and during 1997 primarily in connection with a partial refund of prior years' insurance premiums relating to the Partnership's properties.
13. Contingencies:
(a) The Partnership is currently involved in two related lawsuits, Masri vs. Lehman Brothers, Inc., et al. and Bruss, et al. vs. Lehman Brothers, Inc., et al., 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. With respect to the Masri case, no determinations upon any significant issues have been made. The Bruss complaint was filed on January 25, 1999. On September 24, 1999, the court granted the defendants' motion to dismiss the complaint for failure to state a cause of action. The plaintiffs filed an amended complaint on November 30, 1999. The defendants have filed a motion to dismiss the complaint for failure to state a cause of action. The defendants continue to vigorously contest these actions. The Partnership believes it has meritorious defenses to contest the claims. It is not determinable at this time how the outcome of either action will impact the remaining cash reserves of the Partnership.
(b) In May 1999, a lawsuit was filed, Madison Partnership Liquidity Investors XX, et al. vs. The Balcor Company, et al. whereby the General Partner and certain affiliates have been named as defendants. The plaintiffs are entities that initiated tender offers to purchase and, in fact, purchased units in eleven affiliated partnerships. The complaint alleges breach of fiduciary duties and breach of contract under the partnership agreement and seeks the winding up of the affairs of the Partnership, the establishment of a
liquidating trust, the appointment of an independent trustee for the trust and the distribution of a portion of the cash reserves to limited partners. On June 1, 1999, a second lawsuit was filed and was served on August 16, 1999, Sandra Dee vs. The Balcor Company, et al. The Dee complaint is virtually identical to the Madison Partnership complaint and on September 20, 1999 was consolidated into the Madison Partnership case. On January 19, 2000, a hearing was held on the defendants' motion to dismiss the complaint; at the hearing the class allegations were struck regarding eleven of the partnerships, including the Partnership. The defendants intend to vigorously contest these actions. It is not determinable at this time how the outcome of these actions will impact the remaining cash reserves of the Partnership.