SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -----
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1996
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-13348
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BALCOR EQUITY PENSION INVESTORS-II
A REAL ESTATE LIMITED PARTNERSHIP
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-3314331
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 Waukegan Road
Bannockburn, Illinois 60015
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 267-1600
--------------
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
----- -----
<PAGE>
BALCOR EQUITY PENSION INVESTORS-II
A REAL ESTATE LIMITED PARTNERSHIP
(AN ILLINOIS LIMITED PARTNERSHIP)
BALANCE SHEETS
June 30, 1996 and December 31, 1995
(Unaudited)
ASSETS
1996 1995
------------ ------------
Cash and cash equivalents $ 21,642,174 $ 24,596,293
Accounts and accrued interest receivable 546,308 538,041
Prepaid expenses 312,035 213,241
Deferred expenses, net of accumulated
amortization of $1,114,848 in 1996 and
$989,273 in 1995 828,442 740,093
Investment in joint venture with an affiliate 1,427,452 1,336,859
------------ ------------
24,756,411 27,424,527
------------ ------------
Investment in real estate:
Land 26,808,775 26,808,775
Buildings and improvements 109,016,842 108,826,412
------------ ------------
135,825,617 135,635,187
Less accumulated depreciation 44,037,112 42,404,072
------------ ------------
Investment in real estate, net of
accumulated depreciation 91,788,505 93,231,115
------------ ------------
$ 116,544,916 $ 120,655,642
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 145,667 $ 282,014
Due to affiliates 56,940 33,578
Accrued real estate taxes 370,409 448,030
Security deposits 508,090 467,600
------------ ------------
Total liabilities 1,081,106 1,231,222
Affiliates' participation in joint ventures 16,901,009 16,983,307
Limited Partners' capital (939,587 Interests
issued and outstanding) 98,802,994 102,429,946
General Partner's (deficit) capital (240,193) 11,167
------------ ------------
Total partners' capital 98,562,801 102,441,113
------------ ------------
$ 116,544,916 $ 120,655,642
============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR EQUITY PENSION INVESTORS-II
A REAL ESTATE LIMITED PARTNERSHIP
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND EXPENSES
for the six months ended June 30, 1996 and 1995
(Unaudited)
1996 1995
------------ ------------
Income:
Rental income $ 9,610,647 $ 8,865,105
Service income 1,082,326 1,031,403
Interest on short-term investments 583,146 534,317
Interest on loan receivable - first mortgage,
net of amortization of $13,105 in 1995 305,930
Participation in income of joint venture
with an affiliate 60,109 54,201
------------ ------------
Total income 11,336,228 10,790,956
------------ ------------
Expenses:
Depreciation 1,633,040 1,616,418
Amortization of deferred expenses 125,575 115,125
Property operating 3,829,101 3,177,815
Real estate taxes 1,029,659 1,073,519
Property management fees 362,881 346,929
Administrative 530,476 500,836
------------ ------------
Total expenses 7,510,732 6,830,642
------------ ------------
Income before affiliates' participation in
joint ventures 3,825,496 3,960,314
Affiliates' participation in income from
joint ventures (694,540) (679,326)
------------ ------------
Net income $ 3,130,956 $ 3,280,988
============ ============
Net income allocated to General Partner $ 449,568 $ 463,507
============ ============
Net income allocated to Limited Partners $ 2,681,388 $ 2,817,481
============ ============
Net income per Limited Partnership Interest
(939,587 issued and outstanding) $ 2.85 $ 3.00
============ ============
Distributions to General Partner $ 700,928 $ 350,464
============ ============
Distributions to Limited Partners $ 6,308,340 $ 3,154,170
============ ============
Distributions per Limited Partnership Interest:
Taxable $ 5.20 $ 2.60
============ ============
Tax-exempt $ 6.92 $ 3.46
============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR EQUITY PENSION INVESTORS-II
A REAL ESTATE LIMITED PARTNERSHIP
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND EXPENSES
for the quarters ended June 30, 1996 and 1995
(Unaudited)
1996 1995
------------ ------------
Income:
Rental income $ 4,810,548 $ 4,507,607
Service income 643,157 567,258
Interest on short-term investments 269,130 266,733
Interest on loan receivable - first mortgage,
net of amortization of $6,553 in 1995 152,965
Participation in income of joint venture
with an affiliate 27,542 21,613
------------ ------------
Total income 5,750,377 5,516,176
------------ ------------
Expenses:
Depreciation 816,520 808,394
Amortization of deferred expenses 63,948 59,811
Property operating 2,091,146 1,754,750
Real estate taxes 511,985 536,197
Property management fees 179,979 179,306
Administrative 381,133 281,380
------------ ------------
Total expenses 4,044,711 3,619,838
------------ ------------
Income before affiliates' participation in
joint ventures 1,705,666 1,896,338
Affiliates' participation in income from
joint ventures (313,690) (375,681)
------------ ------------
Net income $ 1,391,976 $ 1,520,657
============ ============
Net income allocated to General Partner $ 206,888 $ 223,088
============ ============
Net income allocated to Limited Partners $ 1,185,088 $ 1,297,569
============ ============
Net income per Limited Partnership Interest
(939,587 issued and outstanding) $ 1.26 $ 1.38
============ ============
Distribution to General Partner $ 350,464 $ 175,232
============ ============
Distribution to Limited Partners $ 3,154,170 $ 1,577,085
============ ============
Distribution per Limited Partnership Interest:
Taxable $ 2.60 $ 1.30
============ ============
Tax-exempt $ 3.46 $ 1.73
============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR EQUITY PENSION INVESTORS-II
A REAL ESTATE LIMITED PARTNERSHIP
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1996 and 1995
(Unaudited)
1996 1995
------------ ------------
Operating activities:
Net income $ 3,130,956 $ 3,280,988
Adjustments to reconcile net income to net
cash provided by operating activities:
Affiliates' participation in income
from joint ventures 694,540 679,326
Participation in income of joint
venture with an affiliate (60,109) (54,201)
Depreciation of properties 1,633,040 1,616,418
Amortization of deferred expenses 125,575 115,125
Amortization of loan application and
processing fees 13,105
Payment of leasing commissions (213,924) (165,274)
Net change in:
Accounts and accrued interest
receivable (8,267) (57,620)
Prepaid expenses (98,794) (218,177)
Accounts payable (136,347) (183,188)
Due to affiliates 23,362 (108,642)
Accrued real estate taxes (77,621) (50,732)
Security deposits 40,490 27,611
------------ ------------
Net cash provided by operating activities 5,052,901 4,894,739
------------ ------------
Investing activities:
Capital contribution to joint venture with
an affiliate (45,552)
Distributions from joint venture with
an affiliate 15,068 77,843
Improvements and additions to properties (190,430) (195,643)
------------ ------------
Net cash used in investing activities (220,914) (117,800)
------------ ------------
Financing activities:
Distributions to Limited Partners (6,308,340) (3,154,170)
Distributions to General Partner (700,928) (350,464)
Distributions to joint venture
partners - affiliates (776,838) (741,264)
------------ ------------
Cash used in financing activities (7,786,106) (4,245,898)
------------ ------------
<PAGE>
Net change in cash and cash equivalents (2,954,119) 531,041
Cash and cash equivalents at
beginning of period 24,596,293 17,106,496
------------ ------------
Cash and cash equivalents at end of period $ 21,642,174 $ 17,637,537
============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR EQUITY PENSION INVESTORS-II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Accounting Policy:
In the opinion of management, all adjustments necessary for a fair presentation
have been made to the accompanying statements for the six months and quarter
ended June 30, 1996, and all such adjustments are of a normal and recurring
nature.
2. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates during the
six months and quarter ended June 30, 1996 are:
Paid
-----------------------
Six Months Quarter Payable
------------ --------- ----------
Reimbursement of expenses to
the General Partner, at cost $76,223 $53,612 $56,940
3. Subsequent Event:
In July 1996, the Partnership made a distribution of $3,154,170 ($2.60 per
Taxable Interest and $3.46 per Tax-exempt Interest) to the holders of Limited
Partnership Interests for the second quarter of 1996.
<PAGE>
BALCOR EQUITY PENSION INVESTORS-II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Balcor Equity Pension Investors-II A Real Estate Limited Partnership (the
"Partnership") is a limited partnership formed in 1984 to make first mortgage
loans and to invest in and operate income-producing real property. The
Partnership raised $234,896,750 through the sale of Limited Partnership
Interests and utilized these proceeds to fund seven loans and acquire five real
property investments and a minority joint venture interest in one additional
real property. Subsequently, the Partnership acquired three properties through
foreclosure on loans and accepted prepayments on four additional loans. As of
June 30, 1996, the Partnership operates eight properties and holds a minority
joint venture interest in one additional property.
Inasmuch as the management's discussion and analysis below relates primarily to
the time period since the end of the last fiscal year, investors are encouraged
to review the financial statements and the management's discussion and analysis
contained in the annual report for 1995 for a more complete understanding of
the Partnership's financial position.
Operations
- ----------
Summary of Operations
- ---------------------
Higher rental income at certain of the Partnership's properties was mostly
offset by an increase in property operating expenses. In addition, interest
income on loan receivable ceased due to the Colonial Coach and Castlewood West
loan prepayment in September 1995. As a result, the Partnership's net income
decreased slightly during the six months and quarter ended June 30, 1996, as
compared to the same periods in 1995. Further discussion of the Partnership's
operations is summarized below.
1996 Compared to 1995
- ---------------------
Discussions of fluctuations between 1996 and 1995 refer to the six months and
quarters ended June 30, 1996 and 1995, unless otherwise mentioned.
Primarily as a result of higher average occupancy at the 1275 K Street and
Bingham Farms - Phase V office buildings, higher rental rates at the Bingham
Farms - Phase V, Denver Centerpoint and Westech 360 office buildings, and
higher percentage rents at the Ross Plaza shopping center, rental income
increased during 1996 as compared to 1995.
Primarily as a result of higher reimbursements received from tenants for
operating expenses at the 1275 K Street office building and Ross Plaza shopping
center, service income increased during 1996 when compared to 1995. These
increases were partially offset by lower reimbursements at the Denver
Centerpoint office building.
<PAGE>
Interest income on loan receivable was recognized prior to the Colonial Coach
and Castlewood West loan prepayment in September 1995.
Primarily as a result of higher leasing costs due to increased leasing activity
at the 1275 K Street, Ammendale Technology Park - Phase I, Denver Centerpoint
and Westech 360 office buildings and higher repairs and maintenance at the 1275
K Street, Ammendale Technology Park - Phase I, and Denver Centerpoint office
buildings, property operating expenses increased during 1996 as compared to
1995. These increases were partially offset by lower leasing costs at the Ross
Plaza shopping center.
The Partnership incurred 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. This
increase was partially offset by lower accounting and legal fees.
The 1275 K Street and Westech 360 office buildings are owned through joint
ventures with affiliates. As a result of increased leasing costs at the 1275 K
Street office building, affiliates' participation in income from joint ventures
decreased during the quarter ended June 30, 1996, as compared to the same
period in 1995.
Liquidity and Capital Resources
- ------------------------------
The cash position of the Partnership decreased by approximately $2,954,000 as
of June 30, 1996 as compared to December 31, 1995. Cash flow of approximately
$5,053,000 provided by the Partnership's operating activities includes cash
flow from the operations of the properties and interest income on short-term
investments, which were partially offset by the payment of administrative
expenses. Investing activities consisted of a net contribution made to the
joint venture with an affiliate of approximately $31,000 and improvements to
the properties of approximately $190,000. Financing activities consisted of
distributions to the Partners of approximately $7,009,000 and to the affiliated
joint venture partners of approximately $777,000.
The Partnership classifies the cash flow performance of the properties as
either positive, a marginal deficit or a significant deficit. A deficit is
considered to be significant if it exceeds $250,000 annually or 20% of the
property's rental and service income. The Partnership defines cash flow
generated from its properties as an amount equal to the property's revenue
receipts less property related expenditures. During the six months ended June
30, 1996, seven of the Partnership's eight properties generated positive cash
flow as compared to all eight properties during the same period in 1995. The
Ammendale Technology Park - Phase I generated a marginal cash flow deficit
during the six months ended June 30, 1996, as compared to positive cash flow
during the same period in 1995 due to significantly higher leasing costs in
1996. The Pacific Center Office Buildings, in which the Partnership holds a
minority joint venture interest, generated positive cash flow during the six
months ended June 30, 1996 and 1995.
<PAGE>
As of June 30, 1996, occupancy rates at the Partnership's commercial properties
ranged from 98% to 100%, except for Bingham Farms - Phase V Office Plaza where
the occupancy rate was 83%. The occupancy rate of Spalding Bridge Apartments
was 97%. Many rental markets continue to remain extremely competitive;
therefore, the General Partner's goals are to maintain high occupancy levels
while increasing rents where possible and to monitor and control operating
expenses and capital improvement requirements at the properties.
In July 1996, the Partnership paid $3,154,170 ($2.60 per Taxable Interest and
$3.46 per Tax-exempt Interest) to Limited Partners representing the quarterly
distribution for the second quarter of 1996. The level of this distribution was
consistent with the amount distributed to Limited Partners for the previous
quarter. In addition, during July 1996, the Partnership paid $262,847 to the
General Partner, representing its quarterly distribution for the second quarter
of 1996 and made a contribution of $87,616 to the Repurchase Fund. To date,
including the July 1996 distribution, Limited Partners have received
distributions aggregating approximately $112 per $250 Taxable Interest, of
which $86 represents Net Cash Receipts and $26 represents Net Cash Proceeds,
and $140 per $250 Tax-exempt Interest, of which $114 represents Net Cash
Receipts and $26 represents Net Cash Proceeds. The General Partner expects that
the cash flow from property operations should enable the Partnership to
continue making quarterly distributions to Limited Partners. However, the level
of future distributions will be dependent on the amount of cash flow generated
from property operations and property sales, as to which there can be no
assurances.
The General Partner believes that the market for multifamily housing properties
is favorable to sellers of these properties. Currently, the Partnership is
marketing the Spalding Bridge apartment complex. Additionally, the General
Partner is exploring the sale of its commercial properties. The General
Partner examines each property individually by property type and market in
determining the optimal time to sell each property.
In June 1996, Heitman/JMB Advisory Corporation, an unaffiliated third party,
initiated discussions with the General Partner for a potential sale of all of
the properties of the Partnership. These discussions did not result in any
agreement of terms between the parties, and it is unlikely at this time that a
sale of the Partnership's assets to them will be consummated. This will not
affect the Partnership's strategy as described in the preceding paragraph.
Changing interest rates can impact real estate values in several ways.
Generally, declining interest rates may lower the cost of capital allowing
buyers to pay more for a property whereas rising interest rates may increase
the cost of capital and lower the price of real estate.
During the six months ended June 30, 1996, the General Partner, on behalf of
the Partnership, used amounts placed in the Repurchase Fund to repurchase 1,398
interests from Limited Partners at a cost of $186,349.
Inflation has several types of potentially conflicting impacts on real estate
investments. Short-term inflation can increase real estate operating costs
which may or may not be recovered through increased rents and/or sales prices,
depending on general or local economic conditions. In the long-term, inflation
can be expected to increase operating costs and replacement costs and may lead
to increased rental revenues and real estate values.
<PAGE>
BALCOR EQUITY PENSION INVESTORS-II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
Proposed Class and Derivative Action Lawsuits
- ---------------------------------------------
On May 22, 1996, a proposed class and derivative action complaint was filed,
Chipain vs. Walton Street Capital Acquisition II, LLC (Circuit Court of Cook
County, Illinois, County Department, Chancery Division ("Chancery Court"), Case
No. 96 CH 05299) (the "Chipain Case"), naming the General Partner and the
general partners (together, the "Balcor Defendants") of nine other limited
partnerships sponsored by The Balcor Company (together, with the Partnership,
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.
The Walton and Insignia Defendants filed motions to dismiss the complaint,
which were granted on June 5, 1996. The plaintiffs filed an amended complaint,
which all defendants then moved to dismiss. On June 18, 1996, the court
dismissed the complaint in its entirety as to the Walton and Insignia
Defendants and as to the Balcor Defendants on all counts on which dismissal was
sought.
On June 14, 1996, a second proposed class and derivative action complaint was
filed in Chancery Court, Dee vs. Walton Street Capital Acquisition II, LLC
(Case No. 96 CH 06283) (the "Dee Case"). On July 1, 1996, a proposed class
action complaint was filed in the same 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 same day, the plaintiffs in the Chipain Case withdrew their
complaint. The Dee/Anderson Case names the Balcor Defendants, the Affiliated
Partnerships, and the Walton and Insignia Defendants, as defendants. 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 General Partner's 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 request certification as a class and
derivative action, unspecified compensatory damages and rescission of the
tender offers.
The Balcor Defendants intend to vigorously contest this action. No class has
been certified as of this date. Management of each of the Balcor Defendants
believes they have 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 Partnership.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
(4) Forms of Subscription Agreements, previously filed as Exhibits 4.1.1 and
4.1.2 to Amendment No. 2 dated September 20, 1984 to the Registrant's
Registration Statement (Registration No. 2-91810) and to Amendment No. 1 dated
January 25, 1985 to the Registrant's Registration Statement (Registration No.
2-95409) 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. 0-13348) are incorporated herein by
reference.
(27) Financial Data Schedule of the Registrant for the six month period ending
June 30, 1996 is attached hereto.
(b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter
ended June 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements 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 EQUITY PENSION INVESTORS-II
A REAL ESTATE LIMITED PARTNERSHIP
By: /s/ Thomas E. Meador
-----------------------------
Thomas E. Meador
President and Chief Executive Officer
(Principal Executive Officer) of Balcor
Equity Partners-II, the General Partner
By: /s/ Brian D. Parker
------------------------------
Brian D. Parker
Senior Vice President, and Chief Financial
Officer (Principal Accounting and Financial
Officer) of Balcor Equity Partners-II, the
General Partner
Date: August 12, 1996
-------------------------------
<PAGE>
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<PERIOD-END> JUN-30-1996
<CASH> 21642
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<RECEIVABLES> 546
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22501
<PP&E> 135826
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<TOTAL-ASSETS> 116545
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0
0
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<OTHER-SE> 98563
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