UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-11129
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BALCOR PENSION INVESTORS-III
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(Exact name of registrant as specified in its charter)
Illinois 36-3164211
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 Waukegan Road
Bannockburn, Illinois 60015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 267-1600
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Operations
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Summary of Operations
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During 1996, Balcor Pension Investors-III (the "Partnership") recognized a
recovery of losses related to certain of the Partnership's loans. The
Partnership also recognized a gain on the sale of two loans and a gain related
to the sale of its interest in a minority joint venture with affiliates. The
combined effect of these events resulted in an increase in net income during
1996 as compared to 1995. During 1995, the Partnership recognized gains related
to the sales of two properties, which partially offset the above increase and
contributed to the increase in net income during 1995 as compared to 1994.
During 1995 and 1994, the Partnership received repayments on a total of four
loans. The Partnership also acquired The Woods Apartments through foreclosure
in July 1994. The combined effect of these events, resulted in an increase in
net income during 1995 as compared to 1994. Further discussion of the
Partnership's operations is summarized below.
1996 Compared to 1995
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The repayments and sales of five loans during 1996 and two loans during 1995
resulted in a decrease of approximately $1,473,000 in net interest income on
loans receivable during 1996 as compared to 1995. Deferred interest income of
approximately $406,000 received in connection with the 1996 sale of the
Partnership's interest in the Seafirst Financial Center loan was recognized as
interest income and partially offset the decrease in net interest income on
loans receivable due to the repayments and sales.
The Partnership had two loans on nonaccrual status at December 31, 1995 which
were collateralized by Carmel on Providence Apartments and Bannockburn
Executive Plaza. Both of these loans were sold in 1996. For nonaccrual loans,
income was recorded only as cash payments were received from the borrower. The
funds advanced by the Partnership for these two loans totaled approximately
$6,200,000, representing approximately 6% of original funds advanced. During
1996, the Partnership received cash payments of net interest income totaling
approximately $384,000 on the Carmel on Providence loan. The Partnership would
have received approximately $330,000 of net interest income under the terms of
the original loan agreement. Of the net interest income received, $54,000
relates to costs incurred by the Partnership prior to the borrower's bankruptcy
filing, which have been added to the principal of the loan and which accrued
interest, payable by the borrower on a quarterly basis. In addition,
approximately $457,000 was received on the Bannockburn Executive Plaza loan.
This loan originally matured in January 1994 and was subsequently extended to
December 1997.
Operations of real estate held for sale represent the net operations of the
properties acquired by the Partnership through foreclosure. At December 31,
1996, the Partnership was operating The Woods Apartments and the Orchards
Shopping Center. Original funds advanced by the Partnership total approximately
$6,678,000 for these two properties, representing approximately 6% of original
funds advanced. The sale of the Crossings Shopping Center and the Candlewyck
Apartments in 1995, both of which had been generating income for the year, and
decreased rental and service income at the Orchards Shopping Center during
1996, resulted in a decrease of approximately $217,000 in income from real
estate held for sale during 1996 as compared to 1995. Improved operations at
the Woods Apartments of approximately $202,000 resulting primarily from
increased rental rates and decreased repair and maintenance expenses due to the
completion of structural repairs and exterior painting during 1995,
substantially offset this decrease.
Participation in income of joint ventures with affiliates represents the
Partnership's 27.5% and 12.68% shares of income from the Brookhollow/Stemmons
and Perimeter 400 Center office buildings, respectively. In December 1996, the
joint venture sold the Perimeter 400 Center Office Building and the Partnership
recognized its share of the gain on sale. This was the primary reason for the
increase in participation in income of joint ventures with affiliates during
1996 as compared to 1995.
Proceeds received in connection with the 1995 and 1994 loan repayments and
property sales were invested in short-term investments and subsequently
distributed to Limited Partners in 1995 and January 1996. This, along with
lower average interest rates on short-term interest bearing instruments in
1996, resulted in a decrease in interest income on short-term investments
during 1996 as compared to 1995.
Provisions are charged to income when the General Partner believes an
impairment has occurred to the value of its properties or in a borrower's
ability to repay a loan or in the value of the collateral property.
Determinations of fair value are made periodically on the basis of performance
under the terms of the loan agreement and assessments of property operations.
Determinations of fair value represent estimations based on many variables
which affect the value of real estate, including economic and demographic
conditions. The Partnership did not recognize any provisions for potential
losses related to its loans or real estate held for sale during 1996. During
1995, the Partnership recognized provisions of $756,370 related to one of its
loans. During 1996 and 1995, the Partnership recognized recoveries of
$3,475,817 and $756,370 related to its loans. In addition, allowances of
$467,813 related to the Corporate Campus I Office Building loan were written
off in connection with the loan repayment during 1996. Allowances of $1,070,329
related to the Colony loan were written off in connection with the repayment
during 1995.
During 1995, the Partnership incurred legal, consulting, printing and postage
costs in connection with its response to a tender offer. As a result,
administrative expenses decreased by approximately $164,000 during 1996 as
compared to 1995. The Partnership incurred legal, consulting, printing and
postage costs of approximately $155,000 in connection with its response to 1996
tender offers, which substantially offset the decrease.
During 1996, the Partnership recognized gains of $392,954 and $925,729 in
connection with the sales of its interests in the Bannockburn Executive Plaza
and Carmel on Providence Apartments loans, respectively.
During 1995, the Partnership recognized gains of $717,900 and $1,822,746 in
connection with the sales of the Crossings Shopping Center and the Candlewyck
Apartments, respectively.
1995 Compared to 1994
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The repayment of the Colony Apartments loan in August 1995, the prepayment of
the Continental Park and North Morris Estates loans in June and November 1994,
respectively, and the foreclosure of The Woods Apartments in July 1994 resulted
in a decrease in net interest income on loans receivable during 1995 as
compared to 1994.
During 1995, the Partnership received cash payments of net interest income
totaling approximately $346,000 on the Carmel on Providence loan. The
Partnership would have received approximately $295,000 of net interest income
under the terms of the original loan agreement. Of the net interest income
received, $48,000 relates to costs incurred by the Partnership prior to the
borrower's bankruptcy filing, which have been added to the principal of the
loan and which accrue interest, payable by the borrower on a quarterly basis.
In addition, $564,000 was received on the Bannockburn Executive Plaza loan in
1995.
The Partnership recognized provisions of $600,000 in 1994 related to certain of
its loans. In addition, during 1994, allowances of $3,715,406 related to the
Continental Park loan were written off in connection with the repayment of the
loan at a discount.
At December 31, 1995, the Partnership was operating The Woods Apartments and
the Orchards Shopping Center. The Partnership acquired The Woods Apartments in
July 1994, and this property generated income during 1995. In addition,
operations improved at the Orchards Shopping Center during 1995 primarily due
to increased occupancy levels and decreased interest expense resulting from the
paydown of the first mortgage loan in connection with the sale of the Orchards
Office Building in September 1994. The combined effect of these events resulted
in an increase in income from real estate held for sale of approximately
$875,000 during 1995 as compared to 1994. The 1995 sales of the Crossings
Shopping Center and the Candlewyck Apartments, which were generating income,
partially offset the above increase by approximately $201,000.
Participation in income of joint ventures with affiliates represents the
Partnership's 27.5% and 12.68% shares of income from the Brookhollow/Stemmons
and Perimeter 400 Center office buildings, respectively. During 1995, the
Partnership recognized $247,500 and $84,322 as its share of the recovery of
provisions related to the change in the estimates of the fair values of the
Brookhollow/Stemmons and Perimeter 400 Center office buildings, respectively,
which resulted in an increase in the participation in income during 1995 as
compared to 1994. Increased reimbursements from tenants for real estate taxes,
common area maintenance and tenant construction at the Brookhollow/Stemmons
Office Building also contributed to the increase in income.
Proceeds received in connection with the 1995 and 1994 loan repayments and
property sales were invested when received and resulted in an increase in
interest income on short-term investments during 1995 as compared to 1994.
Higher average interest rates earned on short-term investments also contributed
to the increase. Portions of these proceeds were distributed to Limited
Partners in 1995 and January 1996.
The Partnership's loans generally bear interest at contractually-fixed interest
rates. Some loans also provide for additional interest in the form of
participations, usually consisting of either a share in the capital
appreciation of the property securing the Partnership's loan and/or a share in
the increase of the gross income of the property above a certain level.
Participation income was recognized during 1994 in connection with the North
Morris Estates and Carmel on Providence loans.
Decreases in legal expenses and reduced mortgage servicing fees due to the
repayment of four loans during 1995 and 1994 and the foreclosure of The Woods
Apartments in 1994 resulted in a decrease in administrative expenses during
1995 as compared to 1994.
During 1994, the Partnership recognized a gain of $119,842 on the sale of the
Orchards Office Building.
Liquidity and Capital Resources
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The cash position of the Partnership as of December 31, 1996 increased by
approximately $7,700,000 when compared to December 31, 1995 primarily due to
the proceeds received from the sale of the Bannockburn Executive Plaza loan and
the Perimeter 400 Office Building, in which the Partnership held a minority
joint venture interest. The Partnership generated cash flow totaling
approximately $3,891,000 from its operating activities primarily as a result of
the net interest income earned on its loans receivable, which includes
approximately $406,000 of deferred interest income received in connection with
the sale of the Partnership's interest in the Seafirst Financial Center loan,
the operations of its properties, and the interest received on its short-term
investments, net of the payment of administrative expenses. The Partnership
received funds from investing activities due primarily to the receipt of
proceeds totaling approximately $4,308,000 from the repayment of the Pepper
Square Apartments and Corporate Campus I Office Building loans and
approximately $16,948,000 from the sale of the Partnership's interests in an
additional three loans, less closing costs of approximately $588,000. The
Partnership also received approximately $5,263,000 in distributions from joint
venture partners primarily representing the Partnership's share of proceeds
from the sale of the Perimeter 400 Office Building. The Partnership's financing
activities consisted primarily of the payment of distributions totaling
approximately $19,693,000 to the Partners, repurchases of Limited Partnership
Interests totaling approximately $984,000, an increase in restricted cash and
cash equivalents of approximately $854,000 in the Early Investment Incentive
Fund and principal payments on underlying loans and mortgage notes payable
totaling approximately $646,000. In addition, in January 1997, the Partnership
made a special distribution of $9,499,042 to Limited Partners from Mortgage
Reductions as described below.
The Partnership classifies the cash flow performance of its properties as
either positive, a marginal deficit or a significant deficit, each after
consideration of debt service payments unless otherwise indicated. A deficit is
considered to be significant if it exceeds $250,000 annually or 20% of the
property's rental and service income. The Partnership defines cash flow
generated from its properties as an amount equal to the properties' revenue
receipts less property related expenditures, which include debt service
payments. The Orchards Shopping Center is the only property that has underlying
debt. During 1996 and 1995, all of the Partnership's remaining properties,
including The Brookhollow/Stemmons Office Building, in which the Partnership
holds a minority joint venture interest, generated positive cash flow. The
Perimeter 400 Center Office Building, in which the Partnership held a minority
joint venture interest, was sold in December 1996 and generated positive cash
flow during 1995 and prior to its sale in 1996. In addition, the Crossings
Shopping Center and the Candlewyck Apartments, which were sold in January and
August 1995, generated positive cash flow and a marginal cash flow deficit,
respectively, prior to their sales. As of December 31, 1996, The Woods
Apartments and the Orchards Shopping Center had occupancy rates of 91% and 83%,
respectively.
Currently, the Partnership has entered into a contract to sell The Woods
Apartments for a sale price of $10,300,000. The Partnership is actively
marketing the Orchards Shopping Center, the remaining property in its
portfolio. The Partnership will also examine the terms of the mortgage loan
collateralized by the Orchards Shopping Center, which matures in October 1997,
and may use Partnership reserves to repay the loan if the Partnership does not
sell the property prior to maturity. In addition, the General Partner is
actively marketing the Brookhollow/Stemmons Office Building, in which the
Partnership holds a minority joint venture interest. During December 1996, the
General Partner sold the Perimeter 400 Center Office Building, in which the
Partnership held a minority joint venture interest. The Partnership also
received repayments on two of its loans and sold its interest in three
additional loans during 1996.
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
stemming from litigation involving the Partnership including, but not limited
to, the lawsuits discussed in "Item 3. Legal Proceedings." In the absence of
any contingency, the reserves will be paid within twelve months of the last
property being sold. In the event a contingency exists, reserves may be held by
the Partnership for a longer period of time.
In June 1996, the borrower of the $3,300,000 Pepper Square Apartments
wrap-around loan repaid the loan in full. The Partnership received proceeds of
$1,507,535, which consisted of the original funds advanced on the loan of
$913,765 and equity buildup related to principal payments of $593,770 made on
the underlying loan. The funds advanced by the Partnership represents the
difference between the original loan receivable balance of $3,300,000 and the
original balance of the underlying loan of $2,386,235. The remaining proceeds
were distributed to Partners in July 1996.
In August 1996, the borrower of the $5,800,000 Corporate Campus I Office
Building wrap-around loan repaid the loan at a discount due to the diminished
value of the property. The Partnership received proceeds of $2,800,000 and the
borrower repaid the $2,532,187 underlying mortgage loan. The proceeds received
by the Partnership were distributed to the Partners in October 1996. See Note
11 of Notes to Financial Statements for additional information.
In August 1996, the Partnership sold its interest in the Seafirst Financial
Center loan for $8,344,608. The purchaser acquired the loan receivable subject
to the existing underlying mortgage loan in the amount of $24,376,892. From the
proceeds of the sale, the Partnership paid $296,500 in selling costs. In
addition, the Partnership received $406,426 of previously deferred interest
income. Pursuant to the terms of the sale, $250,000 of the proceeds was held in
escrow until November 1996, at which time the funds were released to the
Partnership. The proceeds received by the Partnership were distributed to the
Partners in October 1996. See Note 12 of Notes to Financial Statements for
additional information.
During October 1996, the Partnership sold its interest in the Bannockburn
Executive Plaza loan for $5,504,780. During February 1995, a plan of
reorganization related to the loan had been confirmed by the Bankruptcy Court
effective March 1995. Pursuant to the plan, the borrower was required to remit
all excess cash flow from property operations on a monthly basis directly to
the holder of the underlying loan to further reduce the principal balance of
the loan. Prior to the sale, excess cash flow of $47,270 was remitted to the
holder of the underlying loan during 1996. The purchaser of the loan receivable
also acquired the existing underlying mortgage loan in the amount of
$3,252,936. From the proceeds of the sale, the Partnership paid $161,500 in
selling costs. Pursuant to the terms of the sale, $250,000 of the proceeds was
held in escrow until December 1996, at which time the funds were released to
the Partnership. The proceeds received by the Partnership were distributed to
the Partners in January 1997. See Note 12 of the Notes to Financial Statements
for additional information.
In December 1996, the Partnership sold its interest in the Carmel on Providence
loan for $3,098,102. The purchaser acquired the loan receivable subject to the
existing underlying mortgage loan in the amount of $1,157,435. From the
proceeds of the sale, the Partnership paid $129,808 in selling costs. The
remaining available proceeds are expected to be distributed to the Partners in
1997. See Note 12 of Notes to Financial Statements for additional information.
The Perimeter 400 Office Building was owned by a joint venture consisting of
the Partnership and three affiliates. In December 1996, the joint venture sold
the property in an all cash sale for $40,700,000. From the proceeds of the
sale, the joint venture paid $882,765 in selling costs. The net proceeds of the
sale were $39,817,235 of which $5,048,825 was the Partnership's share. Pursuant
to the terms of the sale, $1,750,000 of proceeds will be retained by the joint
venture until September 1997. The remaining proceeds received by the
Partnership were distributed to the Partners in January 1997. See Note 10 of
Notes to Financial Statements for additional information.
The Partnership made four distributions totaling $87.34, $132.12 and $34.55 per
Interest in 1996, 1995 and 1994, respectively. See Statement of Partners'
Capital for additional information. Distributions were comprised of $28.50 of
Cash Flow and $58.84 of Mortgage Reductions in 1996, $23.00 of Cash Flow and
$109.12 of Mortgage Reductions in 1995 and $17.50 of Cash Flow and $16.85 of
Mortgage Reductions in 1994. Cash Flow distributions increased in 1996 as
compared to 1995 due to the Cash Flow received in excess of original funds
advanced related to the 1996 loan repayments and sales. Cash flow distributions
increased between 1995 and 1994 due to the payment of a special distribution of
$7.00 per Interest from Cash Flow received from the Colony loan repayment in
October 1995 .
In January 1997, the Partnership paid a distribution of $10,448,946 ($44.00 per
Interest) to the holders of Limited Partnership Interests representing the
regular quarterly distribution for the fourth quarter of 1996 of $4.00 of Cash
Flow per Interest and a special distribution of Mortgage Reductions received
from the sales of the Bannockburn Executive Plaza loan and the Perimeter 400
Office Building, in which the Partnership held a minority joint venture
interest, of $40.00 per Interest. Including the January 1997 distribution,
Limited Partners have received cash distributions totaling $772.26 per $500
Interest. Of this amount, $479.30 represents Cash Flow from operations and
$292.96 represents a return of Original Capital. In January 1997, the
Partnership also paid $79,159 to the General Partner as its distributive share
of Cash Flow distributed for the fourth quarter of 1996 and made a contribution
to the Early Investment Incentive Fund in the amount of $26,386. Future
distributions will be made from the Partnership's remaining available reserves
and the sale of the Partnership's remaining properties, as to which there can
be no assurances.
In February 1997, the General Partner made a settlement payment of $71,243
($0.32 per $500 Interest) to members of the class pursuant to the settlement
approved by the court in November 1996 in the Paul Williams and Beverly Kennedy
et. al. v. Balcor Pension Investors, et. al. class action lawsuit.
During 1996, the General Partner used amounts placed in the Early Investment
Incentive Fund to repurchase 5,159 Interests from Limited Partners at a total
cost of $983,513. In February 1997, the Partnership discontinued the repurchase
of Interests from Limited Partners.
Changing interest rates can impact real estate values in several ways.
Generally, declining interest rates may lower the cost of capital allowing
buyers to pay more for a property whereas rising interest rates may increase
the cost of capital and lower the price of real estate.
Inflation has several types of potentially conflicting impacts on real estate
investments. Short-term inflation can increase real estate operating costs
which may or may not be recovered through increased rents and/or sale prices
depending on general or local economic conditions. In the long-term, inflation
can be expected to increase operating costs and replacement costs and may lead
to increased rental revenues and real estate values.
Certain statements in this Form 10-K 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 projections of revenues, income or losses, capital
expenditures, plans for future operations, financing plans or requirements, and
plans relating to properties of the Partnership, 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 materially
from any future results, performance or achievements expressed or implied by
the forward-looking statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALCOR PENSION INVESTORS-III
By: /s/ Jayne A. Kosik
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Jayne A. Kosik
Managing Director and Chief
Financial Officer (Principal Accounting
Officer) of Balcor Mortgage Advisors-II,
the General Partner
Date: April 4, 1997
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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
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President and Chief Executive
Officer (Principal Executive
Officer) of Balcor Mortgage
/s/ Thomas E. Meador Advisors-II, the General Partner April 4, 1997
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Thomas E. Meador
Managing Director and Chief
Financial Officer (Principal
Accounting Officer) of Balcor
Mortgage Advisors-II, the
/s/ Jayne A. Kosik General Partner April 4, 1997
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Jayne A. Kosik