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 0-10225
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BALCOR PENSION INVESTORS-II
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(Exact name of registrant as specified in its charter)
Illinois 36-3114027
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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 ]
PART I
Item 1. Business
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Balcor Pension Investors-II (the "Registrant") is a limited partnership formed
in 1981 under the laws of the State of Illinois. The Registrant raised
$85,010,000 from sales of Limited Partnership Interests. The Registrant has
retained cash reserves from the sale of its real estate investments for
contingencies which exist or may arise. The Registrant's operations currently
consist of interest income earned on short-term investments and the payment of
administrative expenses.
The Registrant originally funded thirty-three loans, and subsequently funded
three additional loans and acquired thirteen properties through foreclosure.
The Registrant currently has no loans in its portfolio and has disposed of all
of its real property investments.
The Partnership Agreement provides for the dissolution of the Registrant upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Registrant sold its five remaining properties and loan
receivable during 1996. 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 lawsuit
discussed in "Item 3. Legal Proceedings". Due to this litigation, the
Registrant will not be dissolved and the reserves will be held by the
Registrant until the conclusion of all contingencies. There can be no
assurances as to the time frame for the conclusion of these contingencies.
The Registrant no longer has an ownership interest in any real estate
investment. The General Partner is not aware of any material potential
liability relating to environmental issues or conditions affecting real estate
formerly owned by the Registrant.
The officers and employees of Balcor Mortgage Advisors, the General Partner of
the Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.
Item 2. Properties
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As of December 31, 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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Dee vs. Walton Street Capital Acquisition II, LLC
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On June 14, 1996, a proposed class and derivative action complaint was filed,
Dee vs. Walton Street Capital Acquisition II, LLC (Circuit Court of Cook
County, Illinois, County Department, Chancery Division ("Chancery Court"), Case
No. 96 CH 06283) (the "Dee Case"), naming the General Partner and the general
partners (the "Balcor Defendants") of nine other limited partnerships sponsored
by The Balcor Company (together with the Registrant, the "Affiliated
Partnerships"), as well as the Affiliated Partnerships, as defendants.
Additional defendants were Insignia Management Group ("Insignia") and Walton
Street Capital Acquisition II, LLC ("Walton") and certain of their affiliates
and principals (collectively, the "Walton and Insignia Defendants"). The
complaint alleged, among other things, that the tender offers for the purchase
of limited partnership interests in the Affiliated Partnerships made by a joint
venture consisting of affiliates of Insignia and Walton were coercive and
unfair.
On July 1, 1996, another proposed class action complaint was filed in the
Chancery Court, Anderson vs. Balcor Mortgage Advisors (Case No. 96 CH 06884)
(the "Anderson Case"). An amended complaint consolidating the Dee and Anderson
Cases (the "Dee/Anderson Case") was filed on July 25, 1996.
The complaint seeks to assert class and derivative claims against the Walton
and Insignia Defendants and alleges that, in connection with the tender offers,
the Walton and Insignia Defendants misused the Balcor Defendants' and
Insignia's fiduciary positions and knowledge in breach of the Walton and
Insignia Defendants' fiduciary duty and in violation of the Illinois Securities
and Consumer Fraud Acts. The plaintiffs amended their complaint on October 8,
1996, adding additional claims. The plaintiffs requested certification as a
class and derivative action, unspecified compensatory damages and rescission of
the tender offers. Each of the defendants filed motions to dismiss the
complaint for failure to state a cause of action. On January 7, 1997, the
Chancery Court denied the plaintiffs' motion for leave to amend the complaint
and dismissed the matter for failure to state a cause of action, with
prejudice.
On February 3, 1997, the plaintiffs filed a Notice of Appeal of the Chancery
Court's order to the Appellate Court of Illinois. Plaintiff's brief was filed
with the Appellate Court in September 1997. Defendants filed their reply briefs
in January 1998. Oral arguments before the Appellate Court were held on
March 18, 1998. The Appellate Court is expected to issue its opinion in the
spring of 1998, although there can be no assurances on such date.
The Balcor Defendants intend to vigorously contest this action. No class has
been certified as of this date. The Registrant believes it has meritorious
defenses to contest the claims. It is not determinable at this time 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.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
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Matters
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There has not been an established public market for Limited Partnership
Interests and it is not anticipated that one will develop. For information
regarding previous distributions, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources", below.
As of December 31, 1997, the number of record holders of Limited Partnership
Interests of the Registrant was 5,242.
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 $250,695 $6,247,758 $4,965,565 $5,025,224 $4,042,705
Recovery of losses
on loans, real
estate and
accrued interest
receivable None 3,402,517 700,000 1,200,000 None
Provision for
losses on loans,
real estate and
accrued interest
receivable None 284,573 700,000 1,200,000 None
(Loss) income before
gains on sale of
assets and
extraordinary item (49,574) 5,326,428 3,911,624 3,296,690 3,441,260
Net (loss) income (49,574) 13,286,853 3,911,624 3,296,690 3,441,260
Net (loss) income per
average number of
Limited Partnership
Interests outstanding
-Basic and Diluted (.01) 139.42 46.12 38.23 39.64
Total assets 5,704,763 19,533,757 36,089,582 41,439,470 49,823,027
Mortgage notes
payable None None 12,138,360 12,296,687 15,862,096
Distributions per
Limited Partner-
ship Interest(A) 173.40(B) 213.00 103.18 82.50 21.25
(A) These amounts include distributions of Original Capital of $125.95, $112.00
$41.18 and $62.50 per Limited Partnership Interest for the years 1997, 1996,
1995 and 1994, respectively.
(B) In addition to the above distribution, a special distribution of $.47 per
Interest was paid to class members including certain current investors in the
Partnership pursuant to the settlement of a class action lawsuit.
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Operations
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Summary of Operations
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Balcor Pension Investors - II (the "Partnership") recognized significant gains
on the sales of its five remaining properties, which were generating income
from operations prior to their sales, and the Alzina Office Building loan in
1996. In addition, the Partnership recognized a recovery of a loss related to
the Alzina Office Building loan in 1996. As a result, the Partnership
recognized a net loss in 1997 as compared to net income in 1996. The
recognition of the gains on sales and the recovery of a loss were the primary
reasons for the increase in net income in 1996 as compared to 1995. Further
discussion of the Partnership's operations is summarized below.
1997 Compared to 1996
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Due to the sale of the Partnership's interest in the Alzina Office Building
loan in 1996, the Partnership recognized a gain of $306,759 and net interest
income on loan receivable ceased during 1996.
During 1996, the Partnership sold the Parkway Distribution Center and
Cumberland Pines, Hollowbrook and Sherwood Acres - Phases I and II apartment
complexes which had been generating income from operations prior to their
sales. The Partnership recognized gains in connection with four of these sales
totaling $8,227,212. The Partnership did not recognize any gain or loss in
connection with the sale of Hollowbrook Apartments. In addition, during 1997,
the Partnership paid additional expenditures related to certain of the
properties sold during 1996 which resulted in a loss from operations of real
estate held for sale during 1997 as compared to income in 1996.
Due to higher average cash balances in 1997, interest income on short-term
investments increased during 1997 as compared to 1996.
The Alzina Office Building loan bore interest at a contractually-fixed interest
rate. The loan also provided for a participation by the Partnership in
increases in the value of the collateral property when the loan was repaid or
refinanced. In addition, the loan agreement allowed the Partnership to receive
a percentage of rental income exceeding a base amount. This participation
income was reflected in the accompanying Statements of Income and Expenses when
received. The Partnership received participation income on the Alzina Office
Building loan during 1996.
Provisions were charged to income when the General Partner believed an
impairment had occurred to the value of its properties or in a borrower's
ability to repay a loan or in the value of the collateral property.
Determinations of fair value were made periodically on the basis of performance
under the terms of the loan agreement, assessments of property operations and
the property's estimated sales price less closing costs. Determinations of fair
value represented estimations based on many variables which affected the value
of real estate, including economic and demographic conditions. During 1996, the
Partnership recognized a recovery of $3,302,517 related to the Alzina Office
Building loan, a provision of $284,573 related to the Hollowbrook Apartments, a
recovery of $100,000 and a write off of a previously established allowance of
$684,573 related to the Partnership's real estate held for sale. The provisions
were recognized to provide for changes in the estimate of the fair value of
certain properties in the Partnership's portfolio.
The Partnership recognized other income during 1997 in connection with refunds
of prior years' insurance premiums relating to the Partnership's properties.
Legal, consulting, printing and postage costs incurred in connection with a
response to a tender offer during 1996 resulted in a decrease in administrative
expenses during 1997 as compared to 1996. In addition, lower legal and
portfolio management fees during 1997 contributed to the decrease in
administrative expenses.
In connection with the 1996 sale of the Sherwood Acres-Phases I and II
apartment complexes, the Partnership paid prepayment penalties of $453,928 and
wrote off the remaining unamortized deferred expenses related to the properties
of $99,229. In addition, the Partnership paid a prepayment penalty in
connection with the 1996 sale of the Parkway Distribution Center of $20,389.
These amounts totaling $573,546 were recognized as debt extinguishment expenses
in 1996 and classified as extraordinary items for financial statement purposes.
1996 Compared to 1995
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The repayment of the Stonegate Austin Mobile Home Park wrap-around loan in
March 1995 and the sale of the Partnership's interest in the Alzina Office
Building wrap-around loan in August 1996 resulted in a decrease in net interest
income on loans receivable during 1996 as compared to 1995.
The sale of the Partnership's interest in the Alzina Office Building loan, and
the related payoff of the underlying mortgage, resulted in a decrease in
interest expense on loans payable during 1996 as compared to 1995.
Operations of real estate held for sale represent the net operations of those
properties acquired by the Partnership through foreclosure. During 1996, the
Partnership sold the Parkway Distribution Center and Cumberland Pines, Sherwood
Acres - Phases I and II and Hollowbrook apartment complexes. Original funds
advanced by the Partnership totaled approximately $13,339,000 for these real
estate investments. The property sales resulted in a decrease in income from
operations of real estate held for sale during 1996 as compared to 1995.
Contributing to the decrease in income from operations during 1996 was
increased repair and maintenance expense at the Hollowbrook Apartments for roof
repairs and at the Sherwood Acres - Phases I and II Apartments for replacement
of floor coverings and the completion of structural, asphalt and pool repairs.
These expenditures were incurred to prepare the properties for sale in 1996.
The Partnership received participation income on the Alzina Office Building
loan during 1995 and prior to its sale in August 1996.
During 1995, the Partnership recognized a provision of $700,000 related to its
loans and a recovery of $700,000 related to its real estate held for sale. The
provision was recognized to provide for changes in the estimate of the fair
value of certain properties in the Partnership's portfolio.
The Partnership incurred higher legal, consulting, printing and postage costs
in connection with its response to a tender offer during 1996. As a result,
administrative expenses increased during 1996 as compared to 1995.
Liquidity and Capital Resources
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The cash position of the Partnership decreased by approximately $14,845,000 as
of December 31, 1997 when compared to December 31, 1996 primarily due to
special distributions made in January 1997 from proceeds received in connection
with the 1996 sales of the Sherwood Acres - Phases I and II and Hollowbrook
apartment complexes and the Parkway Distribution Center. The Partnership
generated cash flow totaling approximately $486,000 from its operating
activities primarily as a result of the interest income earned on its
short-term investments, net of the payment of administrative and certain
property related expenses. In addition, the Partnership received insurance
proceeds for fire damage incurred at the Sherwood Acres - Phases I and II
apartment complexes. The Partnership used cash of approximately $15,331,000 to
fund its financing activities which consisted primarily of the payment of
distributions to the Partners and an increase in cash in the Early Investment
Incentive Fund. In addition, in January 1998, the Partnership made a
distribution to Limited Partners of $606,122 from remaining available Cash Flow
reserves, 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. The Partnership sold its remaining five properties and loan
receivable during 1996. 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 lawsuit
discussed in "Item 3. Legal Proceedings". Due to this litigation, the
Partnership will not be dissolved and the reserves will be held by the
Partnership until the conclusion of all contingencies. There can be no
assurances as to the time frame for conclusion of these contingencies.
Pursuant to the sale agreement for the Sherwood Acres - Phases I and II
apartment complexes, $250,000 of the sale proceeds was retained by the
Partnership and was unavailable for distribution until February 1997, at which
time the funds were released in full.
In February 1997, the General Partner made a settlement payment of $35,067
($0.47 per $1,000 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.
The General Partner made a contribution of $38,963 to the Partnership, of which
the plaintiffs' counsel received $3,896 pursuant to the settlement agreement.
Of the settlement amount, $13,828 was paid to original investors who held their
Limited Partnership Interests at the date of the settlement and was recorded as
a distribution to Limited Partners in the Financial Statements. The remaining
portion of the settlement of $21,239 was paid to original investors who
previously had sold their Interests in the Partnership. This amount was
recorded as an administrative expense in the Financial Statements. Similar
contributions and payments were made on the seven other partnerships included
in the lawsuit in addition to those payments described above. The Balcor
Company paid an additional $635,000 to the plaintiffs' class counsel and The
Balcor Company received approximately $946,000 from the eight partnerships as a
reimbursement of its legal expenses, of which $67,039 was the Partnership's
share.
In February 1997, the Partnership discontinued the repurchase of Interests from
Limited Partners. As of December 31, 1997, there was 8,136 Interests and cash
of $3,659,687 held in the Early Investment Incentive Fund.
The Partnership made distributions totaling $173.40, $213.00 and $103.18 per
Interest in 1997, 1996 and 1995, respectively. See Statement of Partners'
Capital for additional information. Distributions were comprised of $47.45 of
Cash Flow and $125.95 of Mortgage Reductions in 1997, $101.00 of Cash Flow and
$112.00 of Mortgage Reductions in 1996 and $62.00 of Cash Flow and $41.18 of
Mortgage Reductions in 1995.
In January 1998, the Partnership made a distribution of $606,122 ($7.13 per
Interest) to the holders of Limited Partnership Interests from remaining
available Cash Flow reserves. Including the January 1998 distribution, Limited
Partners have received distributions totaling $1,750.21 per $1,000 Interest. Of
this amount, $1,101.08 represents Cash Flow from operations and $649.13
represents a return of Original Capital. In January 1998, the Partnership also
paid $50,510 to the General Partner as its distributive share of the Cash Flow
distributed for the fourth quarter of 1997 and made a contribution to the Early
Investment Incentive Fund of $16,837. 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.
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.
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 Mortgage Advisors, 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.
(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 $2,821 in 1997 with respect to one of the executive
officers and directors of Balcor Mortgage Advisors, 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 9 of Notes to Financial
Statements for information relating to transactions with affiliates.
Item 12. Security Ownership of Certain Beneficial Owners and Management
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(a) No person owns of record or is known by the Registrant to own beneficially
more than 5% of the outstanding Limited Partnership Interests of the
Registrant.
(b) The Registrant, through the Early Investment Incentive Fund, Balcor
Mortgage Advisors and their officers and partners own as a group the following
Limited Partnership Interests of the Registrant:
Amount
Beneficially
Title of Class Owned Percent of Class
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Limited Partnership 8,188 Interests 9.6%
Interests
Relatives of the officers and affiliates of the partners of the General Partner
own one additional interest.
(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 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. 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 of Limited Partnership and Amended and
Restated Certificate of Limited Partnership, previously filed as Exhibits 3(a)
and 3(b) to Amendment No. 1 to the Registrant's Registration Statement on Form
S-11 dated May 7, 1981 (Registration No. 2-70841), are incorporated herein by
reference.
(4) Form of Subscription Agreement previously filed as Exhibit 4(a) to
Amendment No. 1 to the Registrant's Registration Statement on Form S-11 dated
May 7, 1981 (Registration No. 2-70841) and Form of Confirmation regarding
Interests in the Registrant set forth as Exhibit 4.2 to the Registrant's Report
on Form 10-Q for the quarter ended June 30, 1992 (Commission File No. 0-10225)
are incorporated herein by reference.
(10)(i)(a) Agreement of Sale and attachment thereto relating to the sale of
Cumberland Pines Apartments, Atlanta, Georgia, previously filed as Exhibit (10)
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996, is incorporated herein by reference.
(b) First, Second and Third Amendments to Agreement of Sale and Escrow Trust
Instructions relating to the sale of Cumberland Pines Apartments, Atlanta,
Georgia, previously filed as Exhibits (99)(a)(b) and (c) to the Registrant's
Current Report on Form 8-K dated June 28, 1996, is incorporated herein by
reference.
(ii) Purchase and Sale Agreement regarding the sale of the Partnership's
interest in the Alzina Office Building loan, previously filed as Exhibit (10)
(iii) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, is incorporated herein by reference.
(iii)(a) Agreement of Sale and attachment thereto and Amendment to Agreement of
Sale and Escrow Agreement relating to the sale of Parkway Commerce Center, Fort
Lauderdale, Florida, previously filed as Exhibits 2(a) and 2(b) to the
Registrant's Current Report on Form 8-K dated August 13, 1996, is incorporated
herein by reference.
(b) Second Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of Parkway Commerce Center, Fort Lauderdale, Florida, previously filed as
Exhibit (99) to the Registrant's Current Report on Form 8-K dated September 17,
1996, is incorporated herein by reference.
(iv)(a) Agreement of Sale and attachment thereto and First Amendment to
Agreement of Sale relating to the sale of Hollowbrook Apartments, Orlando,
Florida, previously filed as Exhibits 2(a) and 2(b) to the Registrant's Current
Report on Form 8-K dated September 17, 1996, are incorporated herein by
reference.
(b) Letter Agreement relating to the sale of Hollowbrook Apartments, Orlando,
Florida, previously filed as Exhibit (99) to the Registrant's Current Report on
Form 8-K dated October 14, 1996, is incorporated herein by reference.
(v)(a) Agreement of Sale and attachment thereto relating to the sale of
Sherwood Acres Apartments, Phases I and II, Baton Rouge, Louisiana, previously
filed as Exhibit (2) to the Registrant's Current Report on Form 8-K dated
October 14, 1996, is incorporated herein by reference.
(b) First Amendment to Agreement of Sale relating to the sale of Sherwood Acres
Apartments, Phases I and II, Baton Rouge, Louisiana, previously filed as
Exhibit (10)(v)(b) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, is incorporated herein by reference.
(c) Second Amendment to Agreement of Sale relating to the sale of Sherwood
Acres Apartments, Phases I and II, Baton Rouge, Louisiana, previously filed as
Exhibit (10)(v)(c) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, 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.
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-II
By:/s/Jayne A. Kosik
------------------------
Jayne A. Kosik
Senior Managing Director and Chief
Financial Officer (Principal
Accounting Officer)
of Balcor Mortgage Advisors,
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 Mortgage
Advisors, the General Partner
/s/Thomas E. Meador March 25, 1998
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Thomas E. Meador
Senior Managing Director and Chief
Financial Officer (Principal
Accounting Officer)
of Balcor Mortgage Advisors, the
General Partner
/s/Jayne A. Kosik March 25, 1998
- -------------------- --------------
Jayne A. Kosik
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1997 and 1996
Statements of Partners' Capital, 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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Balcor Pension Investors-II:
We have audited the financial statements of Balcor Pension Investors-II (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 Pension Investors-II at
December 31, 1997 and 1996, and the results of its operations and its cash
flows for the 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
interests in real estate. At December 31, 1996, the Partnership had disposed of
all of its remaining real estate interests. Upon resolution of the litigation
described in Note 12 to the financial statements, the Partnership intends to
cease operations and dissolve.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 23, 1998
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
------------- -------------
Cash and cash equivalents $ 2,007,987 $ 16,852,472
Cash and cash equivalents - Early Investment
Incentive Fund 3,659,687 1,969,827
Accounts and accrued interest receivable 37,089 711,458
------------- -------------
$ 5,704,763 $ 19,533,757
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 24,414 $ 110,948
Due to affiliates 27,638 79,549
------------- -------------
Total liabilities 52,052 190,497
------------- -------------
Commitments and contingencies
Limited Partners' capital (85,010
Interests issued) 10,617,808 23,962,626
Less Interests held by Early Investment
Incentive Fund (8,136 in 1997 and 1996) (5,015,607) (5,015,607)
------------- -------------
5,602,201 18,947,019
General Partner's capital 50,510 396,241
------------- -------------
Total partners' capital 5,652,711 19,343,260
------------- -------------
$ 5,704,763 $ 19,533,757
============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
for the years ended December 31, 1997, 1996 and 1995
Partners' Capital (Deficit) Accounts
--------------------------------------------
General Limited
Total Partner Partners
------------- ------------- -------------
Balance at December 31, 1994 $ 28,768,562 $ (1,241,763) $ 30,010,325
Repurchase of 1,433 Limited
Partnership Interests (537,463) (537,463)
Cash distributions (A) (8,563,222) (439,219) (8,124,003)
Net income for the year
ended December 31,1995 3,911,624 293,372 3,618,252
------------- ------------- -------------
Balance at December 31, 1995 23,579,501 (1,387,610) 24,967,111
Repurchase of 826 Limited
Partnership Interests (289,903) (289,903)
Cash distributions (A) (17,140,072) (715,501) (16,424,571)
Deemed distribution (B) (93,119) (93,119)
Net income for the year
ended December 31, 1996 13,286,853 2,499,352 10,787,501
------------- ------------- -------------
Balance at December 31, 1996 19,343,260 396,241 18,947,019
Cash distributions (A) (13,679,938) (336,144) (13,343,794)
Cash contribution 38,963 38,963
Net loss for the year
ended December 31, 1997 (49,574) (48,550) (1,024)
------------- ------------- -------------
Balance at December 31, 1997 $ 5,652,711 $ 50,510 $ 5,602,201
============= ============= =============
(A) Summary of cash distributions paid per Limited Partnership Interest:
1997 1996 1995
------------- ------------- -------------
First Quarter $ 120.50 (C) $ 6.00 $ 5.00
Second Quarter 52.90 6.00 30.00
Third Quarter None 114.00 63.18
Fourth Quarter None 87.00 5.00
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
for the years ended December 31, 1997, 1996 and 1995
(Continued)
(B) This amount represents a state withholding tax paid on behalf of the
Limited Partners relating to the gain on the sale of the Cumberland
Pines Apartments.
(C) In addition to the above distribution, a special distribution of $0.47
per Interest was paid to class members including certain current
investors in the Partnership pursuant to the settlement of a class
action lawsuit.
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------- ------------- -------------
Income:
Interest on loans
receivable $ 940,283 $ 1,770,802
Less interest on loans
payable - underlying
mortgages 177,681 319,438
------------- -------------
Net interest income
on loans 762,602 1,451,364
(Loss) income from
operations of real estate
held for sale $ (146,539) 1,347,251 2,215,579
Interest on short-term
investments 383,076 324,895 358,245
Participation income 410,493 240,377
Recovery of losses on loans,
real estate and accrued
interest receivable 3,402,517 700,000
Other income 14,158
------------- ------------- -------------
Total income 250,695 6,247,758 4,965,565
------------- ------------- -------------
Expenses:
Provision for potential
losses on loans, real
estate and accrued
interest receivable 284,573 700,000
Administrative 300,269 636,757 353,941
------------- ------------- -------------
Total expenses 300,269 921,330 1,053,941
------------- ------------- -------------
(Loss) income before gain on
sale of loan receivable,
gains on sales of
real estate and
extraordinary item (49,574) 5,326,428 3,911,624
Gain on sale of loan
receivable 306,759
Gains on sales of real estate 8,227,212
------------- ------------- -------------
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
------------- ------------- -------------
(Loss) income before
extraordinary item (49,574) 13,860,399 3,911,624
Extraordinary Item:
Debt extinguishment expense (573,546)
------------- ------------- -------------
Net (loss) income $ (49,574) $ 13,286,853 $ 3,911,624
============= ============= =============
(Loss) income before
extraordinary item allocated
to General Partner $ (48,550) $ 2,542,368 $ 293,372
============= ============= =============
(Loss) income before
extraordinary item allocated
to Limited Partners $ (1,024) $ 11,318,031 $ 3,618,252
============= ============= =============
(Loss) income before
extraordinary item per
average number of Limited
Partnership Interests
outstanding (76,874 in 1997,
77,375 in 1996 and
78,453 in 1995) - Basic
and Diluted $ (0.01) $ 146.28 $ 46.12
============= ============= =============
Extraordinary item allocated
to General Partner None $ (43,016) None
============= ============= =============
Extraordinary item allocated
to Limited Partners None $ (530,530) None
============= ============= =============
Extraordinary item per
average number of Limited
Partnership Interests
outstanding (77,375 in 1996)
- Basic and Diluted None $ (6.86) None
============= ============= =============
Net (loss) income allocated
to General Partner $ (48,550) $ 2,499,352 $ 293,372
============= ============= =============
Net (loss) income allocated
to Limited Partners $ (1,024) $ 10,787,501 $ 3,618,252
============= ============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
------------- ------------- -------------
Net (loss) income per average
number of Limited
Partnership Interests
outstanding (76,874 in
1997, 77,375 in 1996 and
78,453 in 1995) - Basic
and Diluted $ (0.01) $ 139.42 $ 46.12
============= ============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------- ------------- -------------
Operating activities:
Net (loss) income $ (49,574) $ 13,286,853 $ 3,911,624
Adjustments to reconcile
net (loss) income to net
cash provided by operating
activities:
Debt extinguishment
expense 99,229
Gains on sales of loan
receivable (306,759)
Gain on sale of real
estate (8,227,212)
Recovery of losses on
loans, real estate
and accrued interest
receivable (3,402,517) (700,000)
Provision for potential
losses on loans, real
estate and accrued
interest receivable 284,573 700,000
Amortization of
deferred expenses 52,601 50,954
Net change in:
Escrow deposits 113,962 (59,568)
Escrow deposits -
restricted 81,159
Accounts and accrued
interest receivable 674,369 (461,193) (30,451)
Prepaid expenses 77,752 (65,709)
Accounts payable (86,534) (86,932) 89,424
Due to affiliates (51,911) 60,179 (63,680)
Other liabilities (154,471) (28,244)
------------- ------------- -------------
Net cash provided by
operating activities 486,350 1,336,065 3,885,509
------------- ------------- -------------
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
------------- ------------- -------------
Investing activities:
Collection of principal
on loan receivable 2,400,000
Proceeds from sale of loan
receivable 9,153,755
Costs incurred in connection
with sale of loan
receivable (339,500)
Improvements to real estate (327,184) (106,295)
Proceeds from sales of
real estate 36,887,019
Costs incurred in connection
with sales of real estate (998,826)
------------- -------------
Net cash provided by
investing activities 44,375,264 2,293,705
------------- -------------
Financing activities:
Distributions to Limited
Partners $(13,343,794) $(16,424,571) $ (8,124,003)
Deemed distribution to
Limited Partners (93,119)
Distributions to General
Partner (336,144) (715,501) (439,219)
Contribution by General
Partner 38,963
Increase in cash and cash
equivalents - Early
Investment Incentive
Fund (1,689,860) (1,660,834) (270,755)
Repurchase of Limited
Partnership Interests (289,903) (537,463)
Principal payments on
underlying loans
payable (437,583) (504,499)
Repayment of underlying
loan payable (943,416)
Principal payments on
mortgage notes payable (137,122) (158,327)
Repayment of mortgage
notes payable (12,001,238)
------------- ------------- -------------
Cash used in
financing activities (15,330,835) (31,759,871) (10,977,682)
------------- ------------- -------------
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(Continued)
1997 1996 1995
------------- ------------- -------------
Net change in cash and cash
equivalents (14,844,485) 13,951,458 (4,798,468)
Cash and cash equivalents
at beginning of year 16,852,472 2,901,014 7,699,482
------------- ------------- -------------
Cash and cash equivalents
at end of year $ 2,007,987 $ 16,852,472 $ 2,901,014
============= ============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of Partnership's Business:
Balcor Pension Investors - II (the "Partnership") has retained cash reserves
from the sale of its real estate investments for contingencies which exist or
may arise. The Partnership's operations currently consist of interest income
earned on short-term investments and the payment of administrative expenses.
2. Partnership Termination:
The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Partnership sold its remaining five properties and loan
receivable during 1996. 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 lawsuit
discussed in Note 12 of Notes to Financial Statements. Due to this litigation,
the Partnership will not be dissolved and reserves will be held by the
Partnership until the conclusion of all contingencies. There can be no
assurances as to the time frame for conclusion of these contingencies.
3. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally
accepted accounting principles requires the General Partner to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from those estimates.
(b) The Partnership recorded wrap-around mortgage loans at the face amount of
the mortgage instrument, which included the outstanding indebtedness of the
borrower under the terms of the underlying mortgage obligation. The underlying
mortgage obligation was recorded as a reduction of the wrap-around mortgage
loan and the resulting balance represented the Partnership's net advance to the
borrower. The Partnership was responsible for making periodic payments to the
underlying mortgage lender only to the extent that payments as required by the
wrap-around mortgage agreement were received by the Partnership from the
borrower.
(c) Income on loans was recorded as earned in accordance with the terms of the
related loan agreements. The accrual of interest was discontinued when a loan
became ninety days contractually delinquent or sooner when, in the opinion of
the General Partner, an impairment had occurred in the value of the collateral
property securing the loan. Income on non-accrual loans or loans which were
otherwise not performing in accordance with their terms was recorded on a cash
basis.
Various loan agreements provided for participation by the Partnership in
increases in value of the collateral property when the loan was repaid or
refinanced. In addition, certain loan agreements allowed the Partnership to
receive a percentage of rental income exceeding a base amount. Participation
income was reflected in the accompanying Statements of Income and Expenses when
received.
Income from operations of real estate held for sale was reflected in the
accompanying Statements of Income and Expenses net of related direct operating
expenses.
(d) Loan losses on mortgage notes receivable were charged to income and an
allowance account was established when the General Partner believed the loan
balance would not be recovered. The General Partner assessed the collectibility
of each loan on a periodic basis through a review of the collateral property
operations, the property value and the borrower's ability to repay the loan.
Upon foreclosure, the loan net of the allowance was transferred to real estate
held for sale after the fair value of the property, less costs of disposal was
assessed. Upon the transfer to real estate held for sale, a new basis in the
property was established.
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
General Partner periodically assessed, but not less than on an annual basis,
the fair value of its real estate properties held for sale. The General Partner
estimated the fair value of its properties based on the current sales price
less estimated closing costs. Changes in the property's fair value was recorded
by an adjustment to the property allowance account and was recognized in the
income statement as an increase or decrease through recovery income or a
provision for loss in the period the change in fair value was determined. The
General Partner considered the methods referred to above to result in a
reasonable measurement of a property's fair value, unless other factors
affecting the property's value indicated otherwise.
(e) Deferred expenses, which consisted of financing fees, were amortized over
the terms of the respective agreements and upon sale, any remaining unamortized
balance was recognized as debt extinguishment expense and classified as an
extraordinary item. Leasing commissions were amortized over the life of
each respective lease and upon sale, any remaining unamortized balance was
recognized as amortization expense, which was included in income from
operations of real estate held for sale for financial statement purposes.
(f) 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. 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 from its disclosure requirements.
(g) The Partnership recorded repurchases of Interests by the Early Investment
Incentive Fund as a reduction of Partners' Capital (see Note 4 of Notes to
Financial Statements). Cash and cash equivalents not utilized to repurchase
Interests, but which are part of the Early Investment Incentive Fund, are
classified as restricted assets of the Partnership.
(h) Revenue was recognized on an accrual basis in accordance with generally
accepted accounting principles.
(i) Income from operating leases with significant abatements and/or scheduled
rent increases was recognized on a straight line basis over the respective
lease term. Service income included reimbursements for operating costs such as
real estate taxes, maintenance and insurance and was recognized as revenue in
the period the applicable costs were incurred.
(j) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash or cash
equivalents are held or invested in one financial institution.
(k) 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.
(l) For financial statement purposes, prior to 1996 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, the income (loss) allocations between the partners
have been adjusted for financial statement purposes in 1997 and 1996.
(m) 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 January 23, 1981. The Partnership Agreement
provides for Balcor Mortgage Advisors to be the General Partner and for the
admission of Limited Partners through the sale of Limited Partnership Interests
at $1,000 per Interest, 85,010 of which were sold on or prior to March 15,
1982, the termination date of the offering.
The Partnership Agreement provides that profits and losses are allocated 92.5%
to the Limited Partners, of which 2.5% relates to the Early Investment
Incentive Fund, and 7.5% to the General Partner. For financial statement
purposes, prior to 1996 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, the income (loss) allocations between the partners have been
adjusted for financial statement purposes in 1997 and 1996.
To the extent that Cash Flow was distributed, distributions were made as
follows: (i) 90% of such Cash Flow was distributed to the Limited Partners,
(ii) 7.5% of such Cash Flow was distributed to the General Partner, and (iii)
2.5% of such Cash Flow was set aside in the Early Investment Incentive Fund
("Fund") for payment on dissolution of the Partnership to certain Early
Investors if necessary for them to receive a return of their Original Capital
plus a 22% Cumulative Return. Amounts, if any, remaining in the Fund after the
Early Investors have received such return were to be distributed 90% to all
Limited Partners and 10% to the General Partner. The General Partner will not
receive any distributions in accordance with this provision.
Amounts placed in the Fund were, at the sole discretion of the General Partner
and subject to certain limitations, used to repurchase Interests from existing
Limited Partners. Distributions of Cash Flow and Mortgage Reductions pertaining
to such repurchased Interests are paid to the Fund. In February 1997, the
Partnership discontinued the repurchase of Interests from Limited Partners. As
of December 31, 1997, there were 8,136 Interests and cash of $3,659,687 in the
Fund.
5. Interest Expense:
During the years ended December 31, 1996 and 1995, the Partnership incurred
interest expense of $960,788 and $1,141,917 and paid interest of $960,788 and
$1,135,643, respectively.
6. Loan Receivable Sale and Repayment:
(a) In August 1996, the Partnership sold its interest in the $11,324,000
Alzina Office Building loan for $9,153,755. The purchaser acquired the Alzina
Office Building loan receivable subject to the existing underlying mortgage
loan in the amount of $2,816,504. From the proceeds of the sale, the
Partnership paid $339,500 in selling costs. For financial statement purposes,
the Partnership recognized a gain of $306,759 from the sale of its interest in
this loan. The Partnership also recognized a recovery of the previously
established loss allowance related to this loan of $3,302,517.
(b) In March 1995, the Partnership received $2,625,437 as payment in full on
the Stonegate Austin wrap-around loan, from which the underlying first mortgage
loan of $943,416 was repaid. The face amount of the Partnership's loan was
$2,400,000. The amount received consists of the net receivable of $1,456,584
and additional interest of $225,437.
This loan was referred to as an impaired loan since it was previously modified
and placed on non-accrual status. Net interest income relating to this impaired
loan would have been $44,000 in 1995. Net interest income from this impaired
loan included in the accompanying Statements of Income and Expenses (cash and
accrual basis) amounted to $286,000 in 1995.
7. Allowance for Losses on Loans and Real Estate Held for Sale:
Activity recorded in the allowance for losses on loans and real estate held for
sale during the two years ended December 31, 1996 is described in the table
below:
1996 1995
----------- -----------
Loans:
Balance at beginning of year $ 3,302,517 $ 2,602,517
Provision charged to income None 700,000
Recovery of provision
previously charged to income (3,302,517) None
----------- -----------
Balance at the end of year None $3,302,517
=========== ===========
Real Estate Held for Sale:
Balance at beginning of year $ 500,000 $ 1,200,000
Provision charged to income 284,573 None
Recovery of provision
previously charged
to income (100,000) (700,000)
Direct write-off of
real estate held for
sale against allowance (684,573) None
----------- ----------
Balance at the end of year None $ 500,000
=========== ===========
8. 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 3% to 6% of gross operating receipts.
9. 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
------ ------- ------ ------- ------ -------
Mortgage servicing fees None None $8,011 None $11,901 $920
Reimbursement of expenses
to the General Partner,
at cost:
Accounting $22,232 $5,635 13,645 $11,075 60,318 4,099
Data processing 1,910 1,248 4,304 1,602 20,626 1,619
Investor communica-
tions None None None None 8,378 None
Legal 10,233 2,647 11,805 9,274 17,089 1,530
Portfolio management 57,989 15,085 59,692 45,995 93,125 11,176
Other 11,849 3,023 19,934 11,603 5,031 26
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 who 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 $8,915 and $39,319 in 1996 and 1995, respectively.
The General Partner made a contribution of $38,963 in connection with the
settlement of certain litigation as further discussed in Note 13 of Notes to
Financial Statements.
10. Sales of Real Estate:
(a) In June 1996, the Partnership sold the Cumberland Pines Apartments in an
all cash sale for $9,200,000. From the proceeds of the sale, the Partnership
paid $153,200 in selling costs. In addition, the Partnership paid a state
withholding tax of $93,119 relating to the gain on the sale of the property
which has been recorded as a deemed distribution for financial statement
purposes. The basis of the property was $5,172,532. For financial statement
purposes, the Partnership recognized a gain of $3,874,268 from the sale of this
property.
(b) In October 1996, the Partnership sold the Sherwood Acres - Phases I and II
apartment complexes in an all cash sale for $18,725,000. From the proceeds of
the sale, the Partnership paid $11,348,198 to the third party mortgage holder
in full satisfaction of the first mortgage loans, $427,281 in selling costs and
$453,928 in prepayment penalties. The basis of the property was $14,504,194.
For financial statement purposes, the Partnership recognized a gain of
$3,793,525 from the sale of these properties.
(c) In December 1996, the Partnership sold the Hollowbrook Apartments in an all
cash sale for $3,000,000. From the proceeds of the sale, the Partnership paid
$192,595 in selling costs. The basis of the property was $3,491,978. For
financial statement purposes, the Partnership recognized no gain or loss from
the sale of this property. The Partnership wrote off $684,573 against the
previously established loss allowance related to this property.
(d) In December 1996, the Partnership sold the Parkway Distribution Center in
an all cash sale for $6,050,000. The purchaser was given a credit of $87,981
relating to certain tenant vacancies, resulting in a net sale price of
$5,962,019. From the proceeds of the sale, the Partnership paid $653,040 to the
third party mortgage holder in full satisfaction of the first mortgage loans,
$225,750 in selling costs and $20,389 in prepayment penalties. The basis of the
property was $5,176,850. For financial statement purposes, the Partnership
recognized a gain of $559,419 from the sale of this property. The Partnership
also recognized a recovery of the previously established loss allowance related
to this property of $100,000.
11. Extraordinary Item:
In connection with the 1996 sale of the Sherwood Acres-Phases I and II
apartment complexes, the Partnership paid prepayment penalties of $453,928 and
wrote off the remaining unamortized deferred expenses related to the property
of $99,229. In addition, the Partnership paid a prepayment penalty in
connection with the 1996 sale of the Parkway Distribution Center of $20,389.
These amounts totaling $573,546 were recognized as debt extinguishment expenses
in 1996 and classified as extraordinary items for financial statement purposes.
12. Contingency:
The Partnership is currently involved in a lawsuit whereby the Partnership, the
General Partner and certain third parties have been named as defendants seeking
damages relating to tender offers to purchase interests in the Partnership and
nine affiliated partnerships initiated by the third party defendants in 1996.
The defendants continue to vigorously contest this action. The action has been
dismissed with prejudice and plaintiffs have filed an appeal. It is not
determinable at this time whether or not an unfavorable decision in this action
would have a material adverse impact on the financial position, operations or
liquidity of the Partnership. The Partnership believes it has meritorious
defenses to contest the claims.
13. Settlement of Litigation:
A settlement received final approval by the court in November 1996 in the class
action, Paul Williams and Beverly Kennedy et. al. v. Balcor Pension Investors,
et. al. upon the terms described in the notice to class members in September
1996. The General Partner made a contribution of $38,963 to the Partnership, of
which the plaintiffs' counsel received $3,896 pursuant to the settlement
agreement. In February 1997, the General Partner made a settlement payment of
the remaining $35,067 ($0.47 per Interest) to members of the class pursuant to
the settlement. Of the settlement amount, $13,828 was paid to original
investors who held their Limited Partnership Interests at the date of the
settlement and was recorded as a distribution to Limited Partners in the
Financial Statements. The remaining portion of the settlement of $21,239 was
paid to original investors who previously sold their Interests in the
Partnership. This amount was recorded as an administrative expense in the
Financial Statements. Similar contributions and payments were made on the
seven other partnerships included in the lawsuit in addition to those payments
described above. The Balcor Company paid an additional $635,000 to the
plaintiffs' class counsel and The Balcor Company received approximately
$946,000 from the eight partnerships as a reimbursement of its legal expenses,
of which $67,039 was the Partnership's share. The settlement had no material
impact on the Partnership.
14. Fair Value of Financial Instruments:
As of December 31, 1997 and 1996, the carrying amounts of cash and cash
equivalents, accounts and accrued interest receivable and accounts payable
approximate fair value.
15. Subsequent Event:
In January 1998, the Partnership made a distribution of $606,122 ($7.13 per
Interest) to the holders of Limited Partnership Interests from remaining
available Cash Flow reserves.