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, 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 0-10225
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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 ]
<PAGE>
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's
operations consisted of investing in wrap-around mortgage loans and, to a
lesser extent, investing in other junior mortgage loans and first mortgage
loans. The Registrant also operated properties acquired through foreclosure.
All information included in this report relates to this industry segment.
The Registrant originally funded thirty-three loans. A portion of the Mortgage
Reductions generated by repayments of its loans was reinvested in three
additional loans, a portion was added to the Registrant's working capital
reserves, and the remainder was distributed to the Limited Partners. As a
result of the repayments, foreclosures, and write-offs of thirty-five loans,
and the sale of the remaining loan in 1996, the Registrant has no loans in its
portfolio at December 31, 1996. Thirteen properties were acquired through
foreclosure and the Registrant has disposed of all of its properties, including
five properties in 1996. As of December 31, 1996, the Registrant has no
properties remaining in its portfolio.
The Registrant sold its remaining property, Parkway Distribution Center, in
December 1996. A majority of the proceeds were distributed to Limited Partners
in January 1997. The Registrant has retained a portion of the cash 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
stemming from litigation involving the Registrant including, but not limited
to, the lawsuit 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 Registrant for a longer period of time.
During June, October and December 1996, the Registrant sold the Cumberland
Pines, Sherwood Acres - Phases I and II and Hollowbrook apartment complexes in
all cash sales for $9,200,000, $18,725,000 and $3,000,000, respectively. During
December 1996, the Registrant sold the Parkway Distribution Center in an all
cash sale for $6,050,000. See "Other Information" and "Item 7. Liquidity and
Capital Resources" for additional information.
During August 1996, the Registrant sold its interest in the Alzina Office
Building loan for $9,153,755. See Item 7. "Liquidity and Capital Resources" for
additional information.
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.
<PAGE>
Other Information
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Hollowbrook Apartments
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As previously reported, on September 17, 1996, the Registrant contracted to
sell Hollowbrook Apartments, Orlando, Florida, to an unaffiliated party,
Housing Systems, Incorporated, a Georgia corporation, for a sale price of
$3,000,000. The purchaser assigned its rights under the agreement of sale to
one of its affiliates, H & G Partnership Limited Partnership, a Georgia limited
partnership, and the sale closed on December 9, 1996. From the proceeds of the
sale, the Registrant paid $120,000 to an unaffiliated party as a brokerage
commission, $37,500 to an affiliate of the third party providing property
management services for the property as a fee for services rendered in
connection with the sale of the property and $35,095 in closing costs. The
Registrant received the remaining proceeds of approximately $2,807,000.
Parkway Commerce Center
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As previously reported, on August 13, 1996, the Registrant contracted to sell
Parkway Commerce Center, Fort Lauderdale, Florida, to an unaffiliated party,
Parkway Commerce Center, Ltd., a Florida limited partnership. The sale closed
on December 16, 1996. The sale price was $6,050,000. From the proceeds of the
sale, the Registrant repaid the outstanding balance of the first mortgage loans
of $653,040 and paid a total of $178,500 to two unaffiliated parties as a
brokerage commission, a prepayment penalty of $20,389 and $47,250 in closing
costs. The purchaser received a $87,981 credit against the sale price relating
to certain unleased tenant space at the property. The Registrant received the
remaining proceeds of approximately $5,063,000.
Item 2. Properties
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The Registrant no longer owns any physical properties.
Item 3. Legal Proceedings
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Williams class action
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In February 1990, a proposed class-action complaint was filed, Paul Williams
and Beverly Kennedy, et al. vs. Balcor Pension Investors, et al., Case No.:
90-C-0726, U.S. District Court, Northern District of Illinois). The Registrant,
the General Partner, seven affiliated limited partnerships (together with the
Registrant, the "Related Partnerships") and other affiliates were the
defendants. The complaint alleged violations of Federal securities laws as to
the adequacy and accuracy of disclosure of information in the offering of
limited partnership interests in the Related Partnerships and alleged breach of
fiduciary duty, fraud, negligence and violations under the Racketeer Influenced
and Corrupt Organizations Act. The complaint sought compensatory and punitive
damages.
<PAGE>
A settlement of these proceedings was approved by the District Court on
November 20, 1996 on the terms previously described in the form of settlement
agreement attached as Exhibit 99 to the Registrant's Report on Form 10-Q for
the quarter ended June 30, 1996. Distributions to be paid pursuant to the
settlement were paid in February 1997. All proceedings relating to this matter
are now dismissed.
Proposed Class and Derivative Action Lawsuits
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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 again 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.
On January 7, 1997, the Chancery Court denied the plaintiffs' motion for leave
to amend the complaint and dismissed the matter 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.
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 1996.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
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Matters
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There has not been an established public market for Limited Partnership
Interests and one will not develop. For information regarding previous
distributions, see "Item 7. Management's Discussions and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources", below.
As of December 31, 1996, the number of record holders of Limited Partnership
Interests of the Registrant was 5,256.
Item 6. Selected Financial Data
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Year ended December 31,
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1996 1995 1994 1993 1992
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Total income $6,247,758 $4,965,565 $5,025,224 $4,042,705 $3,967,752
Recovery of losses
on loans, real
estate and
accrued interest
receivable 3,402,517 700,000 1,200,000 None None
Provision for
losses on loans,
real estate and
accrued interest
receivable 284,573 700,000 1,200,000 None 3,780,000
Income (loss) before
gains on sale of
assets and
extraordinary item 5,326,428 3,911,624 3,296,690 3,441,260 (447,588)
Net income 13,286,853 3,911,624 3,296,690 3,441,260 51,158
Net income per
average number
of Limited Partner-
ship Interests
outstanding 139.42 46.12 38.23 39.64 .59
Total assets 19,533,757 36,089,582 41,439,470 49,823,027 50,793,577
Mortgage notes
payable None 12,138,360 12,296,687 15,862,096 17,179,483
Distributions per
Limited Partner-
ship Interest(A) 214.10 103.18 82.50 21.25 29.75
(A)These amounts include distributions of Original Capital of $112.00, $41.18
$62.50 per Limited Partnership Interest for the years 1996, 1995 and 1994,
respectively.
<PAGE>
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-II (the "Partnership") sold all of its
remaining investments, including five properties and one loan receivable. As a
result, the Partnership recognized significant gains, which was the primary
reason for the increase in net income during 1996 as compared to 1995. In
addition, the Partnership recognized a recovery of the previously established
loss allowance related to the Alzina Office Building loan which contributed to
the increase in net income during 1996. During 1995, operations continued to
improve at all of the properties owned by the Partnership resulting 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 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. At December 31,
1996, the Partnership did not operate any properties. The Partnership sold the
Cumberland Pines, Sherwood Acres - Phases I and II and Hollowbrook apartment
complexes in June, October and December 1996, respectively. In addition, the
Partnership sold the Parkway Distribution Center in December 1996. 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 Alzina Office Building loan bore interest at a contractually-fixed interest
rate. The loan also provided for participation by the Partnership in increases
in 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 1995 and prior to its sale in August 1996.
<PAGE>
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. During 1996, the Partnership recognized a recovery of $3,302,517
related to its loan, and recognized a provision of $284,573, 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. 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 provisions
were 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 the second quarter of
1996. As a result, administrative expenses increased during 1996 as compared to
1995.
During 1996, the Partnership recognized a gain for financial statement purposes
of $306,759 in connection with the sale of its interest in the Alzina Office
Building loan, exclusive of the recovery of a previously established loss
allowance related to this loan of $3,302,517.
During 1996, the Partnership sold the Cumberland Pines and Sherwood Acres
Phases I and II apartment complexes and the Parkway Distribution Center. As a
result, the Partnership recognized gains in connection with these sales
totaling $8,227,212 for financial statement purposes.
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 financing fees 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 were recognized as extraordinary items in 1996 and classified as
debt extinguishment expenses of $573,546 for financial statement purposes.
1995 Compared to 1994
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The repayments of the Tudor Heights Apartments first mortgage loan and the
North Arch Village Apartments wrap-around loan in January and March 1994,
respectively, resulted in a decrease in interest income on loans receivable
during 1995 as compared to 1994. This decrease was partially offset by
additional interest income of approximately $219,000 received in conjunction
with the repayment of the Stonegate Austin Mobile Home Park wrap-around loan in
March 1995.
The North Arch Village and Stonegate Austin loan repayments resulted in a
decrease in interest expense on loans payable during 1995 as compared to 1994.
<PAGE>
At December 31, 1995, the Partnership was operating five properties. Higher
rental income due to higher average occupancy levels and rental rates at all of
the properties, as well as lower repair and maintenance expenditures at the
Hollowbrook and Sherwood Acres - Phases I and II apartment complexes, were the
primary reasons for the increase in income from operations of real estate held
for sale during 1995 as compared to 1994. In addition, refunds relating to
prior years' taxes were received during 1995 from the local taxing authorities
at the Parkway Distribution Center and the Hollowbrook Apartments. These
refunds, combined with lower real estate taxes during 1995 at the Parkway
Distribution Center and the Hollowbrook Apartments and the cessation of
interest expense on the Cumberland Pines Apartment's mortgage note upon
repayment of the loan in 1994, also contributed to the increase.
A special distribution to Limited Partners was made in April 1995 from the
proceeds received in connection with the Tudor Heights and North Arch Village
mortgage loan repayments. Prior to this distribution, these proceeds were
invested in short-term investments. As a result interest income on short-term
investments decreased during 1995 as compared to 1994.
The Partnership received participation income on the Alzina Office Building
loan during 1995 and 1994.
The Partnership received a prepayment premium of $291,000 in January 1994 in
connection with the Tudor Heights loan repayment.
The Partnership recognized a provision of $700,000 and a recovery of $1,200,000
in 1995 and 1994, respectively, related to its loans. In addition, during 1995
and 1994, respectively, the Partnership recognized a recovery of $700,000 and a
provision of $1,200,000 related to the Partnership's real estate held for sale
to provide for changes in the estimate of the fair value of certain properties
in the Partnership's portfolio.
Legal fees incurred in 1994 relating to the Interstate Office Building
litigation resulted in a decrease in administrative expenses during 1995 as
compared to 1994.
Liquidity and Capital Resources
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The cash position of the Partnership increased by approximately $13,951,000 as
of December 31, 1996 when compared to December 31, 1995 primarily due to net
proceeds received from the sales of five properties and from the sale of the
Partnership's interest in the Alzina Office Building loan. The Partnership
generated cash flow totaling approximately $1,336,000 from its operating
activities primarily as a result of the net interest income earned on its
investment in loan receivable, the operations of its properties, and the
interest received on its short-term investments, net of the payment of
administrative expenses. The Partnership also generated cash flow from its
investing activities of approximately $44,375,000 primarily due to the receipt
of proceeds, less selling costs, totaling approximately $35,888,000 from the
sales of the properties and $8,814,000 from the sale of the Partnership's
interest in the Alzina Office Building loan. The Partnership's financing
activities primarily consisted of the payment of distributions totaling
approximately $17,233,000 to the Partners, repurchases of Limited Partnership
Interests totaling approximately $290,000, principal payments on the underlying
loan and mortgage notes payable totaling approximately $575,000, as well as the
repayment of mortgage notes payable of approximately $12,001,000 in connection
<PAGE>
with the property sales. The Partnership also made a special distribution to
Limited Partners from Cash Flow and Mortgage Reductions in January 1997 as
described below.
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. During 1995 and prior to being sold in
1996, all five of the Partnership's properties generated positive cash flow.
The Partnership sold its remaining property, Parkway Distribution Center, in
December 1996. A majority of the proceeds were distributed to Limited Partners
in January 1997. The Partnership has retained a portion of the cash 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 stemming from litigation involving the Partnership including,
but not limited to, the lawsuit 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 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. The remainder of the proceeds were distributed to
the Partners in July 1996. See Note 7 of Notes to Financial Statements for
additional information.
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, paid $427,281 in selling
costs, and paid $453,928 of prepayment penalties. Pursuant to the terms of the
sale, the Partnership retained $250,000 of the proceeds until February 1997,
which has since been released and will be distributed to the Partners in 1997.
A majority of the remaining proceeds were distributed to the Partners in
January 1997. See Note 7 of Notes to Financial Statements for additional
information.
In August 1996, the Partnership sold its interest in the 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. A majority of the remaining proceeds were distributed to the
Partners in October 1996. See Note 6 of the Notes to the Financial Statements
for additional information.
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. Pursuant to the terms of the sale, $50,000 of the
proceeds will be retained by the Partnership until March 1997. A majority of
the remaining proceeds were distributed to the Partners in January 1997. See
Note 7 of Notes to Financial Statements for additional information.
<PAGE>
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,
paid $225,750 in selling costs, and paid a prepayment penalty of $20,389. A
majority of the remaining proceeds were distributed to the Partners in January
1997. See Note 7 of Notes to Financial Statements for additional information.
The Partnership made four distributions totaling $213.00, $103.18 and $82.50
per Interest in 1996, 1995 and 1994, respectively. See Statement of Partners'
Capital for additional information. Distributions were comprised of $101.00 of
Cash Flow and $112.00 of Mortgage Reductions in 1996, $62.00 of Cash Flow and
$41.18 of Mortgage Reductions in 1995 and $20.00 of Cash Flow and $62.50 of
Mortgage Reductions in 1994. The distributions of Mortgage Reductions in 1996,
1995 and 1994 resulted from loan repayments, and property and loan sales. Cash
Flow distributions increased between 1996 and 1995 due to the payment of
special distributions of $48.00 and $29.00 per Interest from Cash Flow reserves
in July and October 1996, respectively. Cash Flow distributions also increased
between 1995 and 1994 due to the payment of a special distribution of $42.00
per Interest from Cash Flow reserves in July 1995.
In January 1997, the Partnership paid $10,243,713 ($120.50 per Interest) to the
holders of Limited Partnership Interests representing the quarterly
distribution of Cash Flow of $5.50 per Interest for the fourth quarter of 1996
and a special distribution of $115.00 per Interest from proceeds received in
connection with the sale of the Sherwood Acres - Phases I and II and
Hollowbrook apartment complexes and the Parkway Distribution Center. The level
of the regular quarterly distribution decreased from the amount distributed to
Limited Partners during the third quarter of 1996 primarily due to decreased
Cash Flow resulting from the loan repayment and property sales in 1996.
Including the January 1997 distribution, Limited Partners have received
distributions totaling $1,690.18 per $1,000 Interest. Of this amount $1,052.00
represents Cash Flow from operations and $638.18 represents a return of
Original Capital. In January 1997, the Partnership also paid $38,963 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 $12,988. The Partnership will distribute any
remaining available proceeds and Cash Flow reserves for distribution in April
1997. In February 1997, the General Partner made a settlement payment of
$35,067 ($.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.
During 1996, the General Partner on behalf of the Partnership used amounts
placed in the Early Investment Incentive Fund to repurchase 826 Interests from
Limited Partners at a total cost of $289,903. In February 1997, the
Partnership discontinued the repurchase of Interests from Limited Partners.
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
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Financial Disclosure
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On September 14, 1995 the Registrant approved the engagement of Coopers &
Lybrand L.L.P. as its independent auditors for the fiscal year ending December
31, 1995 to replace the firm of Ernst & Young L.L.P., who were dismissed as
auditors of the Registrant effective September 14, 1995. The General Partner of
the Registrant approved the change in auditors.
The reports of Ernst & Young L.L.P. on the Registrant's financial statements
for each of the two fiscal years ended December 31, 1994 did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope, or accounting principles.
In connection with the audit of the Registrant's financial statements for each
of the two fiscal years ended December 31, 1994, and in the subsequent interim
period, there were no disagreements with Ernst & Young L.L.P. on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of Ernst &
Young L.L.P. would have caused Ernst & Young L.L.P. to make reference to the
matter in their report.
<PAGE>
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
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Chairman, President and Chief Thomas E. Meador
Executive Officer
Senior Vice President Alexander J. Darragh
Senior Vice President James E. Mendelson
Senior Vice President John K. Powell, Jr.
Managing Director, Chief Jayne A. Kosik
Financial Officer, Treasurer
and Assistant Secretary
Thomas E. Meador (age 49) 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 Director 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 42) joined Balcor in September 1988 and is
responsible for due diligence analysis and real estate advisory services for
Balcor and American Express Company. He also has supervisory responsibility
for Balcor's environmental matters. Mr. Darragh received masters' degrees in
Urban Geography from Queen's University and in Urban Planning from
Northwestern University.
James E. Mendelson (age 34) joined Balcor in July 1984 and is responsible
for Balcor's property sales activities. He also has supervisory
responsibility for Balcor's accounting, financial, treasury, investor
services and investment administration functions. From 1989 to 1995, Mr.
Mendelson was Vice President - Transaction Management and Vice President -
Senior Transaction Manager and had responsibility for various asset
management matters relating to real estate investments made by Balcor,
including negotiations for the restructuring of mortgage loan investments.
Mr. Mendelson received his M.B.A. degree from the University of Chicago.
<PAGE>
John K. Powell, Jr. (age 46) 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 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 39) 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 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 1996.
Item 11. Executive Compensation
- -------------------------------
The Registrant paid $2,289 in 1996 with respect to one of the executive
officers and directors of Balcor Mortgage Advisors, the General Partner.
Certain of the remaining 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. The
Registrant has not paid and does not intend to pay any remuneration to the
remaining executive officers and directors of the General Partner. 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 the information relating to transactions with
affiliates.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(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) Balcor Mortgage Advisors and its officers and partners own as a group the
following Limited Partnership Interests of the Registrant:
Amount
Beneficially
Title of Class Owned Percent of Class
-------------- ------------- ----------------
Limited Partnership 52 Interests Less than 1%
Interests
Relatives and affiliates of the officers and partners of the General Partner
own one Limited Partnership Interest.
<PAGE>
(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
- -------------------------------------------------------
(a, b) See Note 3 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.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a)
(1 & 2) See Index to Financial Statements in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement 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 Report on Form 10-Q for the quarter ended March 31, 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
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 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, are 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 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.
<PAGE>
(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 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 Report on Form 10-Q for the quarter
ended September 30, 1996, is incorporated herein by reference.
(16) Letter from Ernst & Young LLP dated September 19, 1995 regarding the
change in the Registrant's certifying accountant previously filed as Exhibit 16
to the Registrant's Report on Form 8-K/A dated October 27, 1995 (Commission
File No. 0-10225) is hereby incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1996 is attached hereto.
(99) Form of Notice of Proposed Class Action Settlement and Hearing relating
to Paul Williams and Beverly Kennedy, et al. vs. Balcor Pension Investors, et
al. previously filed as Exhibit (99) to the Registrant's Report on Form 10-Q
for the quarter ended June 30, 1996 is incorporated herein by reference.
(b) Reports on Form 8-K:
(i) A Current Report on Form 8-K dated September 17, 1996 was filed reporting
the contract to sell Hollowbrook Apartments (formerly known as Curry Ford
Apartments), Orlando, Florida; the amendment to the contract to sell Parkway
Commerce Center, Fort Lauderdale, Florida; and the closing of the sale of the
Registrant's interest in the Alzina Office Building loan, is incorporated
herein by reference.
(ii) A Current Report on Form 8-K dated October 14, 1996 was filed reporting
the contract to sell Sherwood Acres Apartments, Phases I and II, Baton Rouge,
Louisiana, and a letter agreement relating to the Hollowbrook Apartments,
Orlando, Florida, is incorporated herein by reference.
(c) Exhibits: See Item 14(a)(3) above.
(d) Financial Statement Schedules: None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALCOR PENSION INVESTORS-II
By: /s/Jayne A. Kosik
------------------------
Jayne A. Kosik
Managing Director and Chief
Financial Officer (Principal
Accounting Officer)
of Balcor Mortgage Advisors,
the General Partner
Date: March 26, 1997
--------------
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
/s/Thomas E. Meador Advisors, the General Partner March 26, 1997
- -------------------- --------------
Thomas E. Meador
Managing Director and Chief
Financial Officer (Principal
Accounting Officer)
of Balcor Mortgage Advisors, the
/s/Jayne A. Kosik General Partner March 26, 1997
- -------------------- ---------------
Jayne A. Kosik
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Report of Independent Auditors
Financial Statements
Balance Sheets, December 31, 1996 and 1995
Statements of Partners' Capital, for the years ended December 31, 1996, 1995
and 1994
Statements of Income and Expenses, for the years ended December 31, 1996, 1995
and 1994
Statements of Cash Flows, for the years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
Financial Statement Schedules are omitted for the reason that they are
inapplicable or equivalent information has been included elsewhere herein.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Balcor Pension Investors-II:
We have audited the accompanying balance sheets of Balcor Pension Investors-II
(An Illinois Limited Partnership) as of December 31, 1996 and 1995 and the
related statements of partners' capital, income and expenses, and cash flows
for each of the two years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash
flows for the each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As described in Note 1 to the financial statements, the Partnership Agreement
provides for the dissolution of the Partnership upon the disposition of all it
interests in real estate. At December 31, 1996, the Partnership has disposed
of all its real estate interests. Upon resolution of the litigation described
in Note 10 to the financial statements, the Partnership intends to cease
operations and dissolve.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 26, 1997
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Balcor Pension Investors-II:
We have audited the accompanying statements of partners' capital, income and
expenses and cash flows of Balcor Pension Investors-II (An Illinois Limited
Partnership) for the year ended December 31, 1994. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Balcor
Pension Investors-II (An Illinois Limited Partnership) for the year ended
December 31, 1994, in conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
March 20, 1995
<PAGE>
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
1996 1995
------------- -------------
Cash and cash equivalents $ 16,852,472 $ 2,901,014
Cash and cash equivalents - Early Investment
Incentive Fund 1,969,827 308,993
Escrow deposits 113,962
Accounts and accrued interest receivable 711,458 250,265
Prepaid expenses 77,752
Deferred expenses, net of accumulated
amortization of $195,352 in 1995 151,830
------------- -------------
19,533,757 3,803,816
------------- -------------
Investment in loan receivable:
Wrap-around loan receivable 11,324,000
Less:
Loan payable - underlying mortgage 3,254,087
Allowance for potential loan loss 3,302,517
-------------
Net investment in loan receivable 4,767,396
Real estate held for sale (net of allowance
of $500,000 in 1995) 27,518,370
-------------
32,285,766
------------- -------------
$ 19,533,757 $ 36,089,582
============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable $ 110,948 $ 197,880
Due to affiliates 79,549 19,370
Other liabilities 154,471
Mortgage notes payable 12,138,360
------------- -------------
Total liabilities 190,497 12,510,081
------------- -------------
Commitments and contingencies
Limited Partners' capital (85,010
Interests issued) 23,962,626 29,692,815
Less Interests held by Early Investment
Incentive Fund (8,136 in 1996
and 7,310 in 1995) (5,015,607) (4,725,704)
------------- -------------
18,947,019 24,967,111
General Partner's capital (deficit) 396,241 (1,387,610)
------------- -------------
Total partners' capital 19,343,260 23,579,501
------------- -------------
$ 19,533,757 $ 36,089,582
============= =============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
for the years ended December 31, 1996, 1995 and 1994
Partners' Capital (Deficit) Accounts
------------- -------------- --------------
General Limited
Total Partner Partners
------------- -------------- --------------
Balance at December 31, 1993 $ 32,638,613 $ (1,347,331) $ 33,985,944
Repurchase of 981 Limited
Partnership Interests (432,537) (432,537)
Cash distributions (A) (6,734,204) (141,684) (6,592,520)
Net income for the year
ended December 31, 1994 3,296,690 247,252 3,049,438
------------- -------------- --------------
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
============= ============== ==============
(A) Summary of cash distributions paid per Limited Partnership Interest:
1996 1995 1994
------------- -------------- --------------
First Quarter $ 6.00 $ 5.00 $ 5.00
Second Quarter 6.00 30.00 47.50
Third Quarter 114.00 63.18 25.00
Fourth Quarter 87.00 5.00 5.00
(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.
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------- -------------- --------------
Income:
Interest on loans
receivable $ 940,283 $ 1,770,802 $ 1,991,074
Less interest on loans
payable - underlying
mortgages 177,681 319,438 466,076
------------- -------------- --------------
Net interest income on
loans 762,602 1,451,364 1,524,998
Income from operations
of real estate held
for sale 1,347,251 2,215,579 1,344,513
Interest on short-term
investments 324,895 358,245 441,103
Participation income 410,493 240,377 223,610
Prepayment premium 291,000
Recovery of losses on loans,
real estate and accrued
interest receivable 3,402,517 700,000 1,200,000
------------- -------------- --------------
Total income 6,247,758 4,965,565 5,025,224
------------- -------------- --------------
Expenses:
Provision for potential
losses on loans, real
estate and accrued
interest receivable 284,573 700,000 1,200,000
Administrative 636,757 353,941 528,534
------------- -------------- --------------
Total expenses 921,330 1,053,941 1,728,534
------------- -------------- --------------
Income before gain on sale of
loan receivable, gains on
sales of real estate and
extraordinary item 5,326,428 3,911,624 3,296,690
Gain on sale of loan receivable 306,759
Gains on sales of real estate 8,227,212
------------- -------------- --------------
Income before extraordinary
item 13,860,399 3,911,624 3,296,690
Extraordinary Item:
Debt extinguishment expense (573,546)
------------- -------------- --------------
Net Income $ 13,286,853 $ 3,911,624 $ 3,296,690
============= ============== ==============
Income before extraordinary
item allocated to General
<PAGE>
Partner $ 2,542,368 $ 293,372 $ 247,252
============= ============== ==============
Income before extraordinary
item allocated to Limited
Partners $ 11,318,031 $ 3,618,252 $ 3,049,438
============= ============== ==============
Income before extraordinary
item per average number of
Limited Partnership Interests
outstanding (77,375 in 1996,
78,453 in 1995 and 79,768
in 1994) $ 146.28 $ 46.12 $ 38.23
============= ============== ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1996, 1995 and 1994
(Continued)
1996 1995 1994
------------- -------------- --------------
Extraordinary item allocated
to General Partner $ (43,016) None None
============= ============== ==============
Extraordinary item allocated
to Limited Partners $ (530,530) None None
============= ============== ==============
Extraordinary item per average
number of Limited Partnership
Interests outstanding (77,375
in 1996) $ (6.86) None None
============= ============== ==============
Net income allocated to
General Partner $ 2,499,352 $ 293,372 $ 247,252
============= ============== ==============
Net income allocated to
Limited Partners $ 10,787,501 $ 3,618,252 $ 3,049,438
============= ============== ==============
Net income per average
number of Limited
Partnership Interests
outstanding (77,375 in
1996, 78,453 in 1995 and
79,768 in 1994) $ 139.42 $ 46.12 $ 38.23
============= ============== ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------- -------------- --------------
Operating activities:
Net income $ 13,286,853 $ 3,911,624 $ 3,296,690
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Debt extinguishment
expense 99,229
Gain on sale 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) (1,200,000)
Provision for potential
losses on loans, real
estate and accrued
interest receivable 284,573 700,000 1,200,000
Collection of
interest income
due at maturity 943,117
Amortization of
deferred expenses 52,601 50,954 62,998
Payment of deferred
expenses (20,233)
Settlement of
litigation (895,162)
Net change in:
Escrow deposits 113,962 (59,568) 34,662
Escrow deposits -
restricted 81,159 138,820
Accounts and
accrued interest
receivable (461,193) (30,451) 192,163
Prepaid expenses 77,752 (65,709) (12,043)
Accounts payable (86,932) 89,424 (24,685)
Due to affiliates 60,179 (63,680) 45,919
Other liabilities (154,471) (28,244) (189,331)
------------- -------------- --------------
Net cash provided by
operating activities 1,336,065 3,885,509 3,572,915
------------- -------------- --------------
Investing activities:
Collection of principal
on loans receivable 2,400,000 12,050,000
Proceeds from sale of loan
<PAGE>
receivable 9,153,755
Costs incurred in connection
with sale of loan
receivable (339,500)
Improvements to real estate (327,184) (106,295) (103,694)
Proceeds from sale 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 11,946,306
------------- -------------- --------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
(Continued)
1996 1995 1994
------------- -------------- --------------
Financing activities:
Distributions to Limited
Partners $(16,424,571) $ (8,124,003) $ (6,592,520)
Deemed distribution to
Limited Partners (93,119)
Distributions to General
Partner (715,501) (439,219) (141,684)
Increase in cash and cash
equivalents - Early
Investment Incentive
Fund (1,660,834) (270,755) (35,905)
Repurchase of Limited
Partnership Interests (289,903) (537,463) (432,537)
Principal payments on
underlying loans
payable (437,583) (504,499) (540,452)
Repayment of underlying
loans payable (943,416) (926,667)
Principal payments on
mortgage notes payable (137,122) (158,327) (195,857)
Repayment of mortgage
notes payable (12,001,238) (3,369,552)
------------- -------------- --------------
Cash used in
financing activities (31,759,871) (10,977,682) (12,235,174)
------------- -------------- --------------
Net change in cash and cash
equivalents 13,951,458 (4,798,468) 3,284,047
Cash and cash equivalents
at beginning of year 2,901,014 7,699,482 4,415,435
------------- -------------- --------------
Cash and cash equivalents
at end of year $ 16,852,472 $ 2,901,014 $ 7,699,482
============= ============== ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-II
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. 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 property, Parkway Distribution
Center, in December 1996. The Partnership has retained a portion of the cash
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 stemming from litigation involving the Partnership including,
but not limited to, the lawsuit as discussed in Note 10 of Notes to Financial
Statements. 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.
2. 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 is reflected in the accompanying Statements of Income and Expenses when
received.
<PAGE>
Income from operations of real estate held for sale is 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 assesses, but not less than on an annual
basis, the fair value of its real estate properties held for sale. The General
Partner estimates the fair value of its properties based on the current sales
price less estimated closing costs. Changes in the property's fair value is
recorded by an adjustment to the property allowance account and is 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 is determined. The
General Partner considers 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 indicate otherwise.
(e) Deferred expenses consist of loan application and processing fees and
mortgage brokerage fees which are amortized over the terms of the respective
agreements, and leasing commissions which are amortized over the life of each
respective lease. Upon sale, any remaining balance is recognized as debt
extinguishment expense and classified as an extraordinary item.
(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. Since quoted market prices are not available for the Partnership's
financial instruments, fair values have been based on estimates using present
value techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, may not be realized in
immediate settlement of the instrument. Statement No. 107 does not apply to all
balance sheet items and excludes certain financial instruments and all
non-financial instruments such as real estate from its disclosure requirements.
(g) The Partnership records repurchases of Interests by the Early Investment
Incentive Fund as a reduction of Partners' Capital (see Note 3). Cash and cash
equivalents not yet utilized to repurchase Interests, but which are part of the
Early Investment Incentive Fund, are classified as restricted assets of the
Partnership.
(h) Revenue is recognized on an accrual basis in accordance with generally
accepted accounting principles.
<PAGE>
(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 from 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 is 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, in previous years partners were allocated
income and loss in accordance with the provisions in the Partnership Agreement.
In order for the capital accounts of the General Partner and Limited Partners
to appropriately reflect their respective remaining economic interests as
provided for in the Partnership Agreement, the General Partner was allocated
additional income in 1996 for financial statement purposes.
(m) Several reclassifications have been made to the previously reported 1994
financial statements to conform with the classification used in 1996 and 1995,
including a reclassification of mortgage servicing fees to administrative
expenses. These reclassifications have not changed the 1994 results.
3. 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.
For financial statement purposes, 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.
To the extent that Cash Flow is distributed, distributions will be made as
follows: (i) 90% of such Cash Flow will be distributed to the Limited Partners,
(ii) 7.5% of such Cash Flow will be distributed to the General Partner, and
(iii) 2.5% of such Cash Flow will be 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 will be
distributed 90% to all Limited Partners and 10% to the General Partner.
Amounts placed in the Fund may, at the sole discretion of the General Partner
and subject to certain limitations, be used to repurchase Interests from
existing Limited Partners. During 1996, the Fund repurchased 826 Interests at a
cost of $289,903. In February 1997, the Partnership discontinued the repurchase
of Interests from Limited Partners. Distributions of Cash Flow and Mortgage
Reductions pertaining to such repurchased Interests are paid to the Fund.
<PAGE>
4. Investment in Loans Receivable:
(a) The Alzina Office Building wrap-around loan receivable, which was funded in
1982, had a balance of $11,324,000 at December 31, 1995. The underlying loan
payable had a balance of $3,254,087 at December 31, 1995. The loan was
scheduled to mature in 1997; however, the Partnership sold its interest in the
loan in August 1996 as described in Note 6 of Notes to Financial Statements.
(b) The Stonegate Austin Mobile Home Park wrap-around loan receivable, which
was funded in 1982, had a balance of $2,400,000 at December 31, 1994. This loan
has been referred to as an impaired loan since it was previously modified and
placed on non-accrual status. There was no allowance related to this loan at
December 31, 1994. The loan was scheduled to mature in 1996; however, the
borrower repaid the loan in full during March 1995 as described in Note 6 of
Notes to Financial Statements. The underlying loan payable had a balance of
$949,564 at December 31, 1994.
Net interest income relating to impaired loans would have been $44,000 in 1995
and $239,000 in 1994. Net interest income from impaired loans included in the
accompanying Statements of Income and Expenses (cash and accrual basis)
amounted to $286,000 in 1995 and $187,000 in 1994.
5. 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 three years ended December 31, 1996 is described in the table
below.
1996 1995 1994
------------ ----------- -----------
Loans:
Balance at beginning of
year $ 3,302,517 $ 2,602,517 $ 4,166,443
Provision charged to
income None 700,000 None
Recovery of provision
previously charged to
income (3,302,517) None (1,200,000)
Direct write-off of loans
against allowance None None (363,926)
------------ ------------ ------------
Balance at the end of
the year None $ 3,302,517 $ 2,602,517
============ ============ ============
<PAGE>
Real Estate Held for Sale:
Balance at beginning of
year $500,000 $ 1,200,000 None
Provision charged to
income 284,573 None $ 1,200,000
Recovery of provision
previously charged
to income (100,000) (700,000) None
Direct write-off of
real estate held for
sale against
allowance (684,573)
----------- ----------- -------------
Balance at the end of
the year None $ 500,000 $ 1,200,000
=========== =========== ============
6. Loan Receivable Sale and Repayments:
(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.
(c) In March 1994, the Partnership received $3,369,762 as payment in full on
the North Arch Village Apartments' wrap-around loan, from which the underlying
first mortgage loan of $926,667 was repaid. The amount received consists of the
face amount of the Partnership's loan of $2,350,000, accrued interest due at
maturity of $943,117 and additional interest of $76,645.
(d) In January 1994, the Partnership received $10,064,858 as payment in full on
the Tudor Heights Apartments' first mortgage loan. The amount received consists
of the face amount of the loan of $9,700,000, a prepayment premium of $291,000
and additional interest of $73,858. Additionally, $248,764 of interest income
that had been accrued and included in the loan balance, was written off against
the previously established allowance for potential loan losses.
7. Sale 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.
<PAGE>
(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.
8. Mortgage Notes Payable:
Mortgage notes payable at December 31, 1995 consisted of the following:
Carrying
Amount of
Notes at
Property 12/31/95
- ---------------- --------
Real estate held for sale:
- --------------------------
Apartments:
Sherwood Acres
Phase I (A) $5,709,078
Sherwood Acres
Phase II (A) 5,709,078
Industrial Park:
Parkway Distri-
bution Center (B) 720,204
-----------
Total $12,138,360
===========
(A) This loan required monthly principal and interest payments at an annual
interest rate of 9.33%. In October 1996 this property was sold. See Note 7 of
Notes to Financial Statements for additional information.
<PAGE>
(B) This loan required monthly principal and interest payments at an annual
interest rate of 9.50%. In December 1996, this property was sold. See Note 7 of
Notes to Financial Statements for additional information.
During the years ended December 31, 1996, 1995 and 1994, the Partnership
incurred interest expense of $960,788, $1,141,917 and $1,282,001 and paid
interest of $960,788, $1,135,643 and $1,282,001, respectively.
9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94
-------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ ------- ------ ------- ------ -------
Mortgage servicing fees $8,011 None $11,901 $920 $ 15,231 $1,185
Property management fees None None None None 235,885 None
Reimbursement of expenses
to the General Partner,
at cost:
Accounting 13,645 $11,075 60,318 4,099 70,948 31,360
Data processing 4,304 1,602 20,626 1,619 33,480 7,511
Investor communica-
tions 8,378 None 13,488 6,530
Legal 11,805 9,274 17,089 1,530 4,142 6,218
Portfolio management 59,692 45,995 93,125 11,176 42,771 24,417
Other 19,934 11,603 5,031 26 20,377 5,829
The Partnership participates in an insurance deductible program with other
affiliated partnerships in which the program pays claims up to the amount
of the deductible under the master insurance policies for its properties. The
program is administered by an affiliate of the General Partner who receives no
fee for administering the program; however, the General Partner is reimbursed
for program expenses. The Partnership paid premiums to the deductible insurance
program of $8,915, $39,319 and $73,320 in 1996, 1995 and 1994, respectively.
Allegiance Realty Group, Inc., an affiliate of the General Partner managed all
of the Partnership's properties, except for the Parkway Distribution Center,
until the affiliate was sold to a third party in November 1994.
10. 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 and
liquidity of the Partnership. The Partnership believes it has meritorious
defenses to contest the claims.
<PAGE>
11. Fair Value of Financial Instruments:
As of December 31, 1996 and 1995, the carrying amounts of cash and cash
equivalents, accounts and accrued interest receivable and accounts payable
approximates fair value.
As of December 31, 1995, the fair value of the Partnership's investment in the
wrap-around loan receivable approximated its carrying value of $8,021,483. The
fair value of the underlying loan payable was $3,079,542 and the carrying value
was $3,254,087.
As of December 31, 1995, the fair value of the mortgage notes payable was based
on borrowing rates available to the Partnership at the end of 1995 for mortgage
loans with similar terms and maturities, which approximated the carrying value.
12. Settlement of Litigation:
A settlement has 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 settlement had no material impact on the Partnership.
13. 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 financing fees 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 were recognized as extraordinary items in 1996 and classified as
debt extinguishment expenses of $573,546 for financial statement purposes.
14. Subsequent Events:
(a) In January 1997, the Partnership paid $10,243,713 ($120.50 per Interest) to
the holders of Limited Partnership Interests representing the quarterly
distribution of Cash Flow of $5.50 per Interest for the fourth quarter of 1996
and a special distribution of $115.00 per Interest in from proceeds received in
connection with the sale of the Sherwood Acres - Phases I and II and
Hollowbrook apartment complexes, and the Parkway Distribution Center.
(b) In February 1997, the General Partner made a settlement payment of $35,067
($.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.
<PAGE>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 18822
<SECURITIES> 0
<RECEIVABLES> 712
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19534
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 19534
<CURRENT-LIABILITIES> 191
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 19343
<TOTAL-LIABILITY-AND-EQUITY> 19534
<SALES> 0
<TOTAL-REVENUES> 14782
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 637
<LOSS-PROVISION> 285
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13860
<INCOME-TAX> 0
<INCOME-CONTINUING> 13860
<DISCONTINUED> 0
<EXTRAORDINARY> (574)
<CHANGES> 0
<NET-INCOME> 13287
<EPS-PRIMARY> 139.42
<EPS-DILUTED> 139.42
</TABLE>
