UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-14351
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BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Illinois 36-3327917
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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 Realty Investors 85-Series II A Real Estate Limited Partnership (the
"Registrant") is a limited partnership formed in 1984 under the laws of the
State of Illinois. The Registrant raised $83,936,000 from sales of Limited
Partnership Interests. The Registrant has retained cash reserves from the sale
of its real estate investments for contingencies which exist or may arise. The
Registrant's operations currently consist of interest income earned on
short-term investments and the payment of administrative expenses.
The Registrant utilized the net offering proceeds to acquire thirteen real
property investments and a minority joint venture interest in one additional
property and has since disposed of all of these investments. The Partnership
Agreement provides that the proceeds of any sale or refinancing of the
Registrant's properties will not be reinvested in new acquisitions.
The Partnership Agreement provides for the dissolution of the Registrant upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Registrant sold seven properties and its minority
joint venture interest in one additional property. During 1997, the Registrant
sold its remaining property, the Steeplechase Apartments. The Registrant has
retained a portion of the cash from the property sales to satisfy obligations
of the Registrant as well as establish a reserve for contingencies. The timing
of the termination of the Registrant and final distribution of cash will depend
upon the nature and extent of liabilities and contingencies which exist or may
arise. Such contingencies may include legal and other fees and costs stemming
from litigation involving the Registrant including, but not limited to, the
lawsuits discussed in "Item 3. Legal Proceedings". In the absence of any such
contingencies, the reserves will be paid within twelve months of the last
property being sold. In the event a contingency continues to exist or arises,
reserves may be held by the Registrant for a longer period of time.
During March 1997, the Registrant sold the Steeplechase Apartments in an all
cash sale for $10,400,000. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources"
for additional information.
The Registrant no longer has an ownership interest in any real estate
investment. The General Partner is not aware of any material potential
liability relating to environmental issues or conditions affecting real estate
formerly owned by the Registrant.
The officers and employees of Balcor Partners-XVII, the General Partner of the
Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.
Item 2. Properties
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As of December 31, 1997, the Registrant did not own any properties.
<PAGE>
In the opinion of the General Partner, the Registrant has obtained adequate
insurance coverage.
See Notes to Financial Statements for other information regarding former real
estate property investments.
Item 3. Legal Proceedings
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Klein, et al. vs. Lehman Brothers, Inc., et al.
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On August 30, 1996, a proposed class action complaint was filed, Lenore Klein,
et al. vs. Lehman Brothers, Inc., et al. (Superior Court of New Jersey, Law
Division, Union County, Docket No. Unn-L-5162-96). The complaint was amended on
each of October 18, 1996, December 5, 1997 and January 15, 1998. The
Registrant, additional limited partnerships which were sponsored by The Balcor
Company (together with the Registrant, the "Affiliated Partnerships"), The
Balcor Company, American Express Company, Lehman Brothers, Inc., Smith Barney,
Inc., American Express Financial Advisors, and other affiliated entities and
various individuals are named defendants in the action. The most recent amended
complaint, plaintiffs' Third Amended Complaint, alleges, among other things,
common law fraud and deceit, negligent misrepresentation, breach of contract,
breach of fiduciary duty and violation of certain New Jersey statutes relating
to the disclosure of information in the offering of limited partnership
interests in the Affiliated Partnerships, the marketing of interests in the
Affiliated Partnerships and the acquisition of real properties for the
Affiliated Partnerships. The Third Amended Complaint seeks judgment for
compensatory damages equal to the amount invested in the Affiliated
Partnerships by the proposed class plus interest; general damages for injuries
arising from the defendants' alleged actions; equitable relief, including
rescission, on certain counts; punitive damages; treble damages on certain
counts; recovery from the defendants of all profits received by them as a
result of their alleged actions relating to the Affiliated Partnerships;
attorneys' fees and other costs.
The 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.
Masri vs. Lehman Brothers, Inc. et al.
- --------------------------------------
On February 29, 1996, a proposed class action complaint was filed, Raymond
Masri vs. Lehman Brothers, Inc., et al., Case No. 96/103727 (Supreme Court of
the State of New York, County of New York). The Registrant, additional limited
partnerships which were sponsored by The Balcor Company, three limited
partnerships sponsored by the predecessor of Lehman Brothers, Inc. (together
with the Registrant and the affiliated partnerships, the "Defendant
Partnerships"), Lehman Brothers, Inc. and Smith Barney, Inc. are defendants.
The complaint alleges, among other things, common law fraud and deceit,
negligent misrepresentation and breach of fiduciary duty relating to the
<PAGE>
disclosure of information in the offering of limited partnership interests in
the Defendant Partnerships. The complaint seeks judgment for compensatory
damages equal to the amount invested in the Defendant Partnerships by the
proposed class plus interest accrued thereon; general damages for injuries
arising from the defendants' alleged actions; recovery from the defendants of
all profits received by them as a result of their alleged actions relating to
the Defendant Partnerships; exemplary damages; attorneys' fees and other costs.
The defendants intend to vigorously contest this action. No class has been
certified as of this date. 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.
Plaintiffs' counsel has indicated an intent to withdraw this complaint.
Raymond Masri has joined as an additional plaintiff in the Lenore Klein matter
discussed above.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of the Limited Partners of the Registrant
during 1997.
<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 it is not anticipated that one will develop. For information
regarding distributions, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
As of December 31, 1997, the number of record holders of Limited Partnership
Interests of the Registrant was 7,352.
Item 6. Selected Financial Data
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Year ended December 31,
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1997 1996 1995 1994 1993
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Total income $662,720 $13,494,868 $13,107,902 $12,877,418 $13,143,237
(Loss) income
before gain on
sales of properties
and extra-
ordinary items (79,115) 1,876,971 (1,479,430) (2,019,363) (2,299,675)
Net income (loss) 4,491,057 27,848,238 (1,479,430) (2,019,363) 1,348,884
Net income (loss)
per Limited
Partnership
Interest-Basic
and Diluted 45.84 328.46 (17.45) (23.82) 15.91
Total assets 2,435,003 18,507,810 51,038,768 52,186,795 54,690,993
Mortgage notes
payable None 7,249,433 53,469,385 53,346,903 57,225,506
Distributions per
Limited Partner-
ship Interest (A) 150.00 None None None None
(A) This amount represents distributions of original capital.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Operations
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Summary of Operations
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Balcor Realty Investors 85-Series II A Real Estate Limited Partnership (the
<PAGE>
"Partnership") sold seven properties and its minority joint venture interest in
one additional property in 1996 and its remaining property in 1997. The
Partnership recognized significantly higher gains in 1996 than in 1997 in
connection with the property sales. As a result, the Partnership recognized
higher net income during 1996 as compared to 1997. The Partnership recognized
net income during 1996 as compared to a net loss during 1995 due to the gains
recognized in connection with the property sales in 1996. Further discussion of
the Partnership's operations is summarized below.
1997 Compared to 1996
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The Partnership sold its remaining property, the Steeplechase Apartments, in
1997 and the Forest Ridge-Phase II, Country Oaks, Chestnut Ridge-Phase I,
Hunters Glen, Marbrisa, Willow Bend Lake and Park Crossing apartment complexes
in 1996 and recognized gains in 1997 and 1996 in connection with these sales
totaling $4,992,080 and $25,641,050, respectively. The sales of these
properties resulted in decreases in rental and service income, interest expense
on mortgage notes payable, depreciation, amortization of deferred expenses,
property operating expenses, real estate taxes and property management fees
during 1997 as compared to 1996.
Due to higher average cash balances resulting from the investment of net
proceeds received in connection with the sales of the Partnership's properties
during the latter part of 1996 prior to distribution to Limited Partners in
January 1997, interest income on short-term investments decreased during 1997
as compared to 1996.
Rosehill Pointe Apartments, in which the Partnership held a minority joint
venture interest, was sold during June 1996. As a result, income from
participation in joint venture with an affiliate ceased during 1996. The
Partnership's share of the gain on the sale is included in participation in
joint venture with an affiliate for 1996. In connection with the sale, the
Partnership also recognized its share of debt extinguishment expense of
$20,945, which was classified as an extraordinary item.
The Partnership recognized other income during 1997 primarily in connection
with refunds of prior years' insurance premiums relating to the Partnership's
properties.
During 1996, the Partnership repaid its General Partner loans. As a result,
interest expense on short-term loans from affiliate ceased during 1996.
As a result of the sales of the Partnership's properties, real estate tax
expense decreased in 1997. In addition, the estimate of 1996 real estate taxes
at the Steeplechase Apartments was higher than the actual expense, resulting in
the Partnership recognizing income during 1997 as compared to expense during
1996.
The Partnership incurred higher professional, legal and portfolio management
fees during 1996, which resulted in a decrease in administrative expenses
during 1997 as compared to 1996.
In connection with the 1997 sale of the Steeplechase Apartments, the
<PAGE>
Partnership paid $289,537 in prepayment penalties and wrote off the remaining
unamortized deferred expenses related to the property of $132,371. In
connection with the 1996 property sales, the Partnership wrote-off the
remaining unamortized deferred expenses in the amount of $709,329. In addition,
in connection with the 1996 sales of Chestnut Ridge - Phase I, Hunters Glen,
Willow Bend Lake and Park Crossing apartment complexes, the Partnership paid
$804,428 in prepayment penalties. These amounts were recognized as
extraordinary items and classified as debt extinguishment expense for financial
statement purposes.
In connection with the 1996 sale of Chestnut Ridge - Phase I Apartments, the
Partnership recognized an extraordinary gain on forgiveness of debt of
$1,864,919.
1996 Compared to 1995
- ---------------------
The 1996 property sales resulted in decreases in rental and service income,
interest expense on mortgage notes payable, depreciation, amortization of
deferred expenses, real estate taxes and property management fees during 1996
as compared to 1995.
Higher average cash balances resulting from the investment of the proceeds
received in connection with the property sales during the latter part of 1996
prior to distribution to Limited Partners in January 1997, resulted in an
increase in interest income on short-term investments during 1996 as compared
to 1995.
Rosehill Pointe Apartments, in which the Partnership held a minority joint
venture interest, was sold during June 1996. As a result of the Partnership's
share of the gain recognized during 1996 in connection with the sale, income
from participation in joint venture with an affiliate increased in 1996 when
compared to 1995.
The repayment of the General Partner loans during 1996 along with lower
interest rates resulted in a decrease in interest expense on short-term loans
from affiliate during 1996 as compared to 1995.
Property operating expenses decreased during 1996 as compared to 1995 due to
the property sales. This decrease of approximately $807,000 was partially
offset by increased repair and maintenance expenditures in 1996 at the Hunters
Glen Apartments of approximately $133,000 relating to basin work and painting
in preparation for the sale.
Higher professional fees resulted in an increase in administrative expenses
during 1996 when compared to 1995.
Liquidity and Capital Resources
- -------------------------------
The cash position of the Partnership decreased by approximately $10,040,000 as
of December 31, 1997 when compared to December 31, 1996 primarily due to the
payments of distributions to Limited Partners in 1997 with proceeds from the
sales of the Partnership's properties during 1997 and the latter part of 1996.
Cash of approximately $415,000 was used in operating activities which consisted
<PAGE>
of the payment of administrative expenses and operating expenses related to
sold properties, which were partially offset by cash flow from the operations
of the Steeplechase Apartments prior to its sale and interest income on
short-term investments. Cash provided by investing activities of approximately
$10,216,000 consisted of net proceeds received in connection with the sale of
the Steeplechase Apartments. Cash used in financing activities of approximately
$19,840,000 consisted primarily of the payment of distributions to Limited
Partners of approximately $12,590,000 and the repayment of a mortgage note
payable of approximately $7,238,000 with proceeds from the Steeplechase
Apartments sale. In addition, in January 1998, the Partnership made a
distribution to Limited Partners of $403,462 from remaining available Net Cash
Proceeds, as discussed below.
The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Partnership sold seven properties and its
minority joint venture interest in one additional property. During 1997, the
Partnership sold its remaining property, the Steeplechase Apartments. The
Partnership has retained a portion of the cash from the property sales to
satisfy obligations of the Partnership as well as establish a reserve for
contingencies. The timing of the termination of the Partnership and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees and costs stemming from litigation involving the Partnership
including, but not limited to the lawsuits discussed in "Item 3. Legal
Proceedings". In the absence of any such contingencies, the reserves will be
paid within twelve months of the last property being sold. In the event a
contingency continues to exist or arises, reserves may be held by the
Partnership for a longer period of time.
In March 1997, the Partnership sold the Steeplechase Apartments in an all cash
sale for $10,400,000. From the proceeds of the sale, the Partnership paid
$7,238,418 to the third party mortgage holder in full satisfaction of the first
mortgage loan, and paid $184,415 in selling costs and $289,537 in prepayment
penalties. Available proceeds were distributed to the Limited Partners in July
1997. See Note 10 of Notes to Financial Statements for additional information.
Pursuant to the sale agreement for the Hunters Glen Apartments, $500,000 of the
sale proceeds was retained by the Partnership and was unavailable for
distribution until January 1997, at which time the funds were released in full.
Pursuant to the sale agreement for the Marbrisa Apartments, $500,000 of the
sale proceeds was retained by the Partnership and was unavailable for
distribution until February 1997, at which time the funds were released in
full.
Pursuant to the sale agreement for the Willow Bend Lake Apartments, $250,000 of
the sale proceeds was retained by the Partnership and was unavailable for
distribution until February 1997, at which time the funds were released in
full.
The Partnership commenced distributions in January 1997 and paid three
distributions totaling $150 per Interest during 1997 from Net Cash Proceeds. In
January 1998, the Partnership paid $403,462 ($4.81 per Interest) to the holders
of Limited Partnership Interests representing a distribution of remaining
available Net Cash Proceeds. Including the January 1998 distribution, Limited
<PAGE>
Partners have received distributions of Net Cash Proceeds of $154.81 per
$1,000 Interest, as well as certain tax benefits. No additional distributions
are anticipated to be made prior to the termination of the Partnership.
However, after paying final partnership expenses, any remaining cash reserves
will be distributed. Limited Partners will not recover a substantial portion of
their original investment.
Item 8. Financial Statements and Supplementary Data
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See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.
The net effect of the differences between the financial statements and the tax
returns is summarized as follows:
December 31, 1997 December 31, 1996
----------------------- -------------------------
Financial Tax Financial Tax
Statements Returns Statements Returns
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Total assets $2,435,003 $11,364,614 $18,507,810 $16,292,048
Partners' capital
(deficit):
General Partner None None (643,026) (191,265)
Limited Partners 2,379,460 11,320,015 11,121,829 17,389,205
Net income:
General Partner 643,026 191,265 278,482 14,418,795
Limited Partners 3,848,031 6,521,210 27,569,756 33,965,368
Per Limited Part-
nership Interest 45.84(A) 77.69 328.46(A) 404.66
(A) Amount represents basic and diluted net income per Limited Partnership
Interest.
Item 9. Changes in and Disagreements with Accountants on Accounting and
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Financial Disclosure
- --------------------
There have been no changes in or disagreements with accountants on any matter
of accounting principles, practices or financial statement disclosure.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
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(a) Neither the Registrant nor Balcor Partners-XVII, its General Partner, has a
Board of Directors.
(b, c & e) The names, ages and business experiences of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:
TITLE OFFICERS
Chairman, President and Chief Thomas E. Meador
Executive Officer
Senior Vice President Alexander J. Darragh
Senior Vice President John K. Powell, Jr.
Senior Managing Director, Chief Jayne A. Kosik
Financial Officer, Treasurer
and Assistant Secretary
Thomas E. Meador (age 50) joined Balcor in July 1979. He is Chairman,
President and Chief Executive Officer and has responsibility for all ongoing
day-to-day activities at Balcor. He is a member of the board of directors of
The Balcor Company. He is also Senior Vice President of American Express
Company and is responsible for its real estate operations worldwide. Prior to
joining Balcor, Mr. Meador was employed at the Harris Trust and Savings Bank in
the commercial real estate division where he was involved in various lending
activities. Mr. Meador received his M.B.A. degree from the Indiana University
Graduate School of Business.
Alexander J. Darragh (age 43) joined Balcor in September 1988 and is
responsible for real estate advisory services for Balcor and American Express
Company. Mr. Darragh received masters' degrees in Urban Geography from Queen's
University and in Urban Planning from Northwestern University.
John K. Powell Jr. (age 47) joined Balcor in September 1985 and is responsible
for portfolio and asset management matters relating to Balcor's partnerships.
Mr. Powell also has supervisory responsibility for Balcor's risk management
function. He is a member of the board of directors of The Balcor Company. He
received a Master of Planning degree from the University of Virginia. Mr.
Powell has been designated a Certified Real Estate Financier by the National
Society for Real Estate Finance and is a full member of the Urban Land
Institute.
Jayne A. Kosik (age 40) joined Balcor in August 1982 and, as Chief Financial
Officer, is responsible for Balcor's financial, human resources and treasury
functions. From June 1989 until October 1996, Ms. Kosik had supervisory
responsibility for accounting functions relating to Balcor's public and private
partnerships. She is also Treasurer and a Senior Managing Director of The
Balcor Company. Ms. Kosik is a Certified Public Accountant.
(d) There is no family relationship between any of the foregoing officers.
<PAGE>
(f) None of the foregoing officers or employees are currently involved in any
material legal proceedings nor were any such proceedings terminated during the
fourth quarter of 1997.
Item 11. Executive Compensation
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The Registrant paid $1,922 in 1997 with respect to one of the executive
officers and directors of Balcor Partners-XVII, the General Partner. The
Registrant has not paid and does not propose to pay any remuneration to the
remaining executive officers and directors of the General Partner. The other
officers receive compensation from The Balcor Company (but not from the
Registrant) for services performed for various affiliated entities, which may
include services performed for the Registrant. However, the General Partner
believes that any such compensation attributable to services performed for the
Registrant is immaterial to the Registrant. See Note 9 of Notes to Financial
Statements for information relating to transactions with affiliates.
Item 12. Security Ownership of Certain Beneficial Owners and Management
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(a) No person owns of record or is known by the Registrant to own beneficially
more than 5% of the outstanding Limited Partnership Interests of the
Registrant.
(b) Balcor Partners-XVII 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
Interest 10 Interests Less than 1%
Relatives of the officers and affiliates of the partners of the General Partner
own 1256 additional Interests.
(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 4 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.
See Note 9 of Notes to Financial Statements for 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 Schedule, and Reports on Form 8-K
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(a)
(1 & 2) See Index to Financial Statements in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement and Certificate of Limited Partnership
set forth as Exhibit 3 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-11 dated March 12, 1985 (Registration No. 2-95000) is
incorporated herein by reference.
(4) Subscription Agreement set forth as Exhibit 4.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-11 dated March 12, 1985
(Registration No. 2-95000) 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 are incorporated herein by reference.
(10) Material Contracts:
(a)(i) Agreement of Sale and attachment thereto relating to the sale of the
Forest Ridge - Phase II apartment complex, Arlington, Texas previously filed as
Exhibit 2 to the Registrant's Current Report on Form 8-K dated April 23, 1996
is incorporated herein by reference.
(ii) Master Amendment and Agreement relating to the sales of the Forest Ridge -
Phase II, apartment complex, Arlington, Texas and Rosehill Pointe apartment
complex, Lenexa, Kansas previously filed as Exhibit 2(b)(i) to the Registrant's
Current Report on Form 8-K dated May 31, 1996 is incorporated herein by
reference.
(iii) Master Amendment and Agreement #2 dated May 22, 1996 relating to the
sales of the Forest Ridge - Phase II, apartment complex, Arlington, Texas and
Rosehill Pointe apartment complex, Lenexa, Kansas previously filed as Exhibit
2(b)(ii) to the Registrant's Current Report on Form 8-K dated May 31, 1996 is
incorporated herein by reference.
(b)(i) Agreement of Sale relating to the sale of the Hunter's Glen Apartments,
St. Louis County, Missouri previously filed as Exhibit 2(a) to the Registrant's
Current Report on Form 8-K dated June 28, 1996 is incorporated herein by
reference.
(ii) Letter Agreement dated June 28, 1996, relating to the sale of Hunter's
Glen apartment complex, St. Louis County, Missouri, previously filed as Exhibit
99 to the Registrant's Current Report on Form 8-K dated July 15, 1996 is
incorporated herein by reference.
(iii) Letter Agreement dated August 2, 1996, relating to the sale of Hunter's
Glen apartment complex, St. Louis County, Missouri previously filed as Exhibit
10(b)(iii) to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996 is incorporated herein by reference.
<PAGE>
(iv) Letter Agreement dated August 16, 1996 relating to the sale of Hunter's
Glen Apartments previously filed as Exhibit (99)(d) to the Registrant's Current
Report on Form 8-K dated August 16, 1996 is incorporated herein by reference.
(c)(i) Agreement of Sale and attachment thereto relating to the sale of Willow
Bend Lake Apartments, East Baton Rouge Parish, Louisiana previously filed as
Exhibit 2 to the Registrant's Current Report on Form 8-K dated September 30,
1996 is incorporated herein by reference.
(ii) First Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of Willow Bend Lake Apartments, East Baton Rouge Parish, Louisiana,
previously filed as Exhibit (10)(c)(ii) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 is incorporated herein by
reference.
(iii) Second Amendment to Agreement of Sale and Escrow Agreement relating to
the sale of Willow Bend Lake Apartments, East Baton Rouge Parish, Louisiana,
previously filed as Exhibit (10)(c)(iii) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 is incorporated herein by
reference.
(d)(i) Agreement of Sale and letter agreements thereto relating to the sale of
Marbrisa apartment complex, Hillsborough County, Florida previously filed as
Exhibit 2(a) to the Registrant's Current Report on Form 8-K dated July 15, 1996
is incorporated herein by reference.
(ii) First Amendment to Agreement of Sale dated August 16, 1996 relating to the
sale of Marbrisa Apartments, Hillsborough County, Florida, previously filed as
Exhibit (99)(a)(i) to the Registrant's Current Report on Form 8-K dated August
16, 1996 is incorporated herein by reference.
(iii) Letter Agreement dated August 20, 1996 relating to the sale of Marbrisa
Apartments, Hillsborough County, Florida, previously filed as Exhibit
(99)(a)(ii) to the Registrant's Current Report on Form 8-K dated August 16,
1996 is incorporated herein by reference.
(iv) Letter Agreements relating to the sale of Marbrisa Apartments,
Hillsborough County, Florida, previously filed as Exhibit (99)(b) to the
Registrant's Current Report on Form 8-K dated September 30, 1996 is
incorporated herein by reference.
(e)(i) Agreement of Sale dated September 3, 1996 relating to the sale of
Chestnut Ridge - Phase I Apartments, Fort Worth, Texas previously filed as
Exhibit 2 to the Registrant's Current Report on Form 8-K dated August 16, 1996
is incorporated herein by reference.
(ii) Letter Agreement relating to the sale of Chestnut Ridge - Phase I
Apartments, Fort Worth, Texas, previously filed as Exhibit (99)(a) to the
Registrant's Current Report on Form 8-K dated September 30, 1996 is
incorporated herein by reference.
(f)(i) Agreement of Sale and attachment thereto relating to the sale of Park
Crossing Apartments, Gwinnett County, Georgia previously filed as Exhibit 2(a)
to the Registrant's Current Report on Form 8-K dated September 16, 1996 is
incorporated herein by reference.
<PAGE>
(ii) First Amendment to Agreement of Sale relating to the Sale of Park Crossing
Apartments, Gwinnett County, Georgia previously filed as Exhibit 2(b) to the
Registrant's Current Report on Form 8-K dated September 16, 1996 is
incorporated herein by reference.
(iii) Letter relating to the sale of Park Crossing Apartments, Gwinnett County,
Georgia previously filed as Exhibit 2(c) to the Registrant's Current Report on
Form 8-K dated September 16, 1996 is incorporated herein by reference.
(g)(i) Agreement of Sale and attachment thereto relating to the sale of
Steeplechase Apartments, Lexington-Fayette, Kentucky previously filed as
Exhibit (2)(i) to the Registrant's Current Report on Form 8-K dated December
20, 1996, is incorporated herein by reference.
(ii) Due Diligence Termination Notice relating to the sale of Steeplechase
Apartments, Lexington-Fayette, Kentucky previously filed as Exhibit (2)(ii) to
the Registrant's Current Report on Form 8-K dated December 20, 1996, is
incorporated herein by reference.
(iii) Reinstatement of, and First Amendment to, Agreement of Sale, relating to
the sale of Steeplechase Apartments, Lexington-Fayette, Kentucky previously
filed as Exhibit (2)(iii) to the Registrant's Current Report on Form 8-K dated
December 20, 1996, is incorporated herein by reference.
(iv) Letter Agreement dated December 20, 1996, relating to the sale of
Steeplechase Apartments, Lexington-Fayette, Kentucky previously filed as
Exhibit (2)(iv) to the Registrant's Current Report on Form 8-K dated December
20, 1996, is incorporated herein by reference.
(v) Letter Agreement dated January 22, 1997 relating to the sale of
Steeplechase Apartments, Lexington-Fayette, Kentucky, previously filed as
Exhibit (10)(g)(v) to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, is incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1997 is attached hereto.
(b) Reports on Form 8-K: No Reports were filed on Form 8-K during the quarter
ended December 31, 1997.
(c) Exhibits: See Item 14(a)(3) above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of l934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
By:/s/ Jayne A. Kosik
--------------------------------
Jayne A. Kosik
Senior Managing Director and Chief
Financial Officer (Principal
Accounting and Financial Officer)
of Balcor Partners-XVII, the
General Partner
Date: March 20,1998
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------------------- ------------------------------ --------------
President and Chief Executive
Officer (Principal Executive
Officer) of Balcor Partners-XVII,
the General Partner
/s/Thomas E. Meador March 20, 1998
- -------------------- --------------
Thomas E. Meador
Senior Managing Director and Chief
Financial Officer (Principal
Accounting and Financial Officer)
of Balcor Partners XVII, the General
Partner
/s/Jayne A. Kosik March 20, 1998
- -------------------- --------------
Jayne A. Kosik
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Financial Statements:
Balance Sheets, December 31, 1997 and 1996
Statements of Partners' Capital (Deficit), for the years ended December 31,
1997, 1996 and 1995
Statements of Income and Expenses, for the years ended December 31, 1997, 1996
and 1995
Statements of Cash Flows, for the years ended December 31, 1997, 1996 and 1995
Notes to Financial Statements
Financial Statement Schedules are omitted for the reason that they are
inapplicable or equivalent information has been included elsewhere herein.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Balcor Realty Investors 85-Series II
A Real Estate Limited Partnership:
We have audited the financial statements of Balcor Realty Investors 85-Series
II A Real Estate Limited Partnership (An Illinois Limited Partnership) as
listed in the Index of this Form 10-K. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Balcor Realty Investors
85-Series II A Real Estate Limited Partnership at December 31, 1997 and 1996,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As described in Note 2 to the financial statements, the partnership agreement
provides for the dissolution of the Partnership upon the disposition of all its
real estate interests. As of December 31, 1997, the Partnership has disposed of
all of its remaining real estate interests. Upon resolution of the litigation
described in Note 14 to the financial statements, the Partnership intends to
cease operations and dissolve.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 18, 1998
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
-------------- --------------
Cash and cash equivalents $ 2,418,169 $ 12,457,760
Escrow deposits 82,469
Accounts and accrued interest receivable 16,834 532,365
Prepaid expenses 19,833
Deferred expenses, net of accumulated
amortization of $113,839 in 1996 140,314
-------------- --------------
2,435,003 13,232,741
-------------- --------------
Investment in real estate:
Land 1,436,769
Buildings and improvements 7,276,630
--------------
8,713,399
Less accumulated depreciation 3,438,330
--------------
Investment in real estate, net of
accumulated depreciation 5,275,069
-------------- --------------
$ 2,435,003 $ 18,507,810
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 20,861 $ 633,881
Due to affiliates 34,682 114,934
Security deposits 30,759
Mortgage note payable 7,249,433
-------------- --------------
Total liabilities 55,543 8,029,007
-------------- --------------
Commitments and contingencies
Limited Partners' capital (83,936
Interests issued and outstanding) 2,379,460 11,121,829
General Partner's deficit None (643,026)
-------------- --------------
Total partners' capital 2,379,460 10,478,803
-------------- --------------
$ 2,435,003 $ 18,507,810
============== ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
for the years ended December 31, 1997, 1996, and 1995
Partners' Capital (Deficit) Accounts
---------------------------------------------
General Limited
Total Partner Partners
--------------- -------------- --------------
Balance at December 31, 1994 $ (15,670,448) $ (906,714) $ (14,763,734)
Net loss for the year
ended December 31, 1995 (1,479,430) (14,794) (1,464,636)
--------------- -------------- --------------
Balance at December 31, 1995 (17,149,878) (921,508) (16,228,370)
Deemed distribution to
Limited Partners (A) (219,557) (219,557)
Net income for the year
ended December 31, 1996 27,848,238 278,482 27,569,756
--------------- -------------- --------------
Balance at December 31, 1996 10,478,803 (643,026) 11,121,829
Cash distributions
to Limited Partners (B) (12,590,400) (12,590,400)
Net income for the year
ended December 31, 1997 4,491,057 643,026 3,848,031
--------------- -------------- --------------
Balance at December 31, 1997 $ 2,379,460 $ None $ 2,379,460
=============== ============== ==============
(A) This amount represents a state withholding tax paid on behalf of
Limited Partners relating to the gain on the sale of Park Crossing
Apartments.
(B) Summary of distributions per Limited Partnership Interest:
1997 1996 1995
--------------- -------------- --------------
First Quarter $ 110.00 None None
Second Quarter 14.00 None None
Third Quarter 26.00 None None
Fourth Quarter None None None
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996, and 1995
1997 1996 1995
------------- -------------- --------------
Income:
Rental and service $ 438,523 $ 10,194,675 $ 13,021,575
Interest on short-term
investments 190,124 229,901 65,886
Participation in income
of joint venture
with an affiliate 3,070,292 20,441
Other income 34,073
--------------- -------------- --------------
Total income 662,720 13,494,868 13,107,902
--------------- -------------- --------------
Expenses:
Interest on mortgage notes
payable 167,177 3,629,339 4,899,174
Interest on short-term loan
from affiliate 477,434 815,156
Depreciation 51,564 1,461,603 1,885,984
Amortization of deferred
expenses 7,943 164,203 209,065
Property operating 220,161 3,975,275 4,649,658
Real estate taxes (19,829) 747,563 988,743
Property management fees 24,335 517,242 644,856
Administrative 290,484 645,238 494,696
--------------- -------------- --------------
Total expenses 741,835 11,617,897 14,587,332
--------------- -------------- --------------
(Loss) income before gain on
sales of properties and
extraordinary items (79,115) 1,876,971 (1,479,430)
Gain on sales of properties 4,992,080 25,641,050
--------------- -------------- --------------
Income (loss) before
extraordinary items 4,912,965 27,518,021 (1,479,430)
--------------- -------------- --------------
Extraordinary items:
Debt extinguishment expenses (421,908) (1,513,757)
Gain on forgiveness of debt 1,864,919
Participation in debt
extinguishment expense
from joint venture with
an affiliate (20,945)
--------------- ------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996, and 1995
(Continued)
1997 1996 1995
------------- -------------- --------------
Total extraordinary items (421,908) 330,217
--------------- -------------- --------------
Net income (loss) $ 4,491,057 $ 27,848,238 $ (1,479,430)
=============== ============== ==============
Income (loss) before
extraordinay items allocated
to General Partner $ 703,434 $ 275,180 $ (14,794)
=============== ============== ==============
Income (loss) before
extraordinary items allocated
to Limited Partners $ 4,209,531 $ 27,242,841 $ (1,464,636)
=============== ============== ==============
Income (loss) before
extraordinary items per
Limited Partnership Interest
(83,936 Interests issued and
outstanding) - Basic and
Diluted $ 50.15 $ 324.57 $ (17.45)
=============== ============== ==============
Extraordinary items allocated
to General Partner $ (60,408) $ 3,302 None
=============== ============== ==============
Extraordinary items allocated
to Limited Partners $ (361,500) $ 326,915 None
=============== ============== ==============
Extraordinary items per
Limited Partnership Interest
(83,936 issued and
outstanding) - Basic and
Diluted $ (4.31) $ 3.89 None
=============== ============== ==============
Net income (loss) allocated
to General Partner $ 643,026 $ 278,482 $ (14,794)
=============== ============== ==============
Net income (loss) allocated
to Limited Partners $ 3,848,031 $ 27,569,756 $ (1,464,636)
=============== ============== ==============
Net income (loss) per Limited
Partnership Interest
(83,936 issued and
outstanding) - Basic and
Diluted $ 45.84 $ 328.46 $ (17.45)
=============== ============== ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996, and 1995
1997 1996 1995
--------------- -------------- --------------
Operating activities:
Net income (loss) $ 4,491,057 $ 27,848,238 $ (1,479,430)
Adjustments to reconcile net
income (loss) to net cash
(used in) or provided
by operating activities:
Gain on sales of
properties (4,992,080) (25,641,050)
Debt extinguishment
expenses 132,371 709,329
Gain on forgiveness of
debt (1,864,919)
Participation in income
of joint venture
with an affiliate (3,070,292) (20,441)
Participation in debt
extinguishment expense
from joint venture
with an affiliate 20,945
Depreciation of
properties 51,564 1,461,603 1,885,984
Amortization of deferred
expenses 7,943 164,203 209,065
Net change in:
Escrow deposits 82,469 1,119,748 (643,654)
Accounts and accrued
interest receivable 515,531 (388,792) 40,002
Prepaid expenses 19,833 118,096 (137,929)
Accounts payable (613,020) 491,722 (101,599)
Due to affiliates (80,252) (641,070) 539,549
Accrued liabilities (431,506) 56,423
Security deposits (30,759) (202,275) 4,461
--------------- -------------- --------------
Net cash (used in) or
provided by operating
activities (415,343) (306,020) 352,431
--------------- -------------- --------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996, and 1995
(Continued)
1997 1996 1995
--------------- -------------- --------------
Investing activities:
Redemption of restricted
investment 480,000
Distributions from joint
venture with an affiliate 1,997,578 125,528
Contribution to joint
venture with an affiliate (155,300)
Proceeds from sales of
properties 10,400,000 61,516,507
Payment of selling costs (184,415) (1,634,268)
--------------- -------------- --------------
Net cash provided by
investing activities 10,215,585 61,724,517 605,528
--------------- -------------- --------------
Financing activities:
Distributions to Limited
Partners $ (12,590,400)
Proceeds from issuance of
mortgage notes payable $ 6,010,000
Repayment of mortgage notes
payable (7,238,418) $ (38,271,532) (5,480,512)
Proceeds from loans payable -
affiliate 85,000
Repayment of loans payable -
affiliate (11,900,605) (480,000)
Proceeds from issuance of
mortgage note payable -
affiliate 142,820
Principal payments on
mortgage notes payable (11,015) (328,312) (407,006)
Funding of repair escrows (157,500)
Releases from escrows 490,992 149,407
Payment of deferred expenses (152,840)
Deemed distribution
to Limited Partners (219,557)
--------------- -------------- --------------
Net cash used in financing
activities (19,839,833) (50,086,194) (433,451)
--------------- -------------- --------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85 - SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996, and 1995
(Continued)
1997 1996 1995
--------------- -------------- --------------
Net change in cash and cash
equivalents (10,039,591) 11,332,303 524,508
Cash and cash equivalents at
beginning of year 12,457,760 1,125,457 600,949
--------------- -------------- --------------
Cash and cash equivalents at
end of year $ 2,418,169 $ 12,457,760 $ 1,125,457
=============== ============== ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR REALTY INVESTORS 85-SERIES II
A REAL ESTATE LIMITED PARTNERSHIP
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Realty Investors 85-Series II A Real Estate Limited Partnership (the
"Partnership") has retained cash reserves from the sale of its real estate
investments for contingencies which exist or may arise. The Partnership's
operations currently consist of interest income earned on short-term
investments and the payment of administrative expenses.
2. Partnership Termination:
The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Partnership sold seven properties and its
minority joint venture interest in one additional property. During 1997, the
Partnership sold its remaining property, the Steeplechase Apartments. The
Partnership has retained a portion of the cash from the property sales to
satisfy obligations of the Partnership as well as establish a reserve for
contingencies. The timing of the termination of the Partnership and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees and costs stemming from litigation involving the Partnership
including, but not limited to, the lawsuits discussed in Note 14 of Notes to
the Financial Statements. In the absence of any such contingencies, the
reserves will be paid within twelve months of the last property being sold. In
the event a contingency continues to exist or arises, reserves may be held by
the Partnership for a longer period of time.
3. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally
accepted accounting principles requires the General Partner to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from those estimates.
(b) Depreciation expense was computed using the straight-line method. Rates
used in the determination of depreciation were based upon the following
estimated useful lives:
Buildings and improvements 30 years
Furniture and fixtures 5 years
Maintenance and repairs were charged to expense when incurred. Expenditures for
improvements were charged to the related asset account.
As properties were sold, the related costs and accumulated depreciation were
removed from the respective accounts. Any gain or loss on disposition was
recognized in accordance with generally accepted accounting principles.
<PAGE>
(c) 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
Partnership recorded its investments in real estate at the lower of cost or
fair value, and periodically assessed, but not less than on an annual basis,
possible impairment to the value of its properties. The General Partner
estimated the fair value of its properties based on the current sales price
less estimated closing costs. Under SFAS 121, the General Partner determined
that no impairment in value had occurred prior to the sales of the properties.
The General Partner considered the method referred to above to result in a
reasonable measurement of a property's fair value, unless other factors
affecting the property's value indicated otherwise.
(d) Deferred expenses consisted of financing fees which were amortized over the
terms of the respective loan agreements. Upon sale, any remaining unamortized
balance was recognized as debt extinguishment expense and classified as an
extraordinary item.
(e) Investment in joint venture with an affiliate represented the recording of
the Partnership's 38.38% interest, under the equity method of accounting, in a
joint venture with an affiliated partnership. Under the equity method of
accounting, the Partnership recorded its initial investment at cost and
adjusted its investment account for additional capital contributions,
distributions and its share of joint venture income or loss.
(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 and investment in joint ventures
from its disclosure requirements.
(g) Revenue was recognized on an accrual basis in accordance with generally
accepted accounting principles.
(h) 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 remaining economic interests as provided for in
the Partnership Agreement, income allocations between the partners have been
adjusted for financial statement purposes in 1997.
(i) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash is held or
invested primarily in one financial institution.
<PAGE>
(j) 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.
(k) Statement of Financial Accounting Standards, No. 128, "Earnings per Share"
was adopted by the Partnership for the year-ended December 31, 1997 and has
been applied to all prior earnings periods presented in the financial
statements. Since the Partnership has no dilutive securities, there is no
difference between basic and diluted net income (loss) per Limited Partnership
Interest.
4. Partnership Agreement:
The Partnership was organized in October 1984. The Partnership Agreement
provides for Balcor Partners-XVII to be the General Partner and for the
admission of Limited Partners through the sale of up to 84,000 Limited
Partnership Interests at $1,000 per Interest, 83,936 of which were sold through
August 22, 1985, the termination date of the offering.
The Partnership Agreement provides that the General Partner will be allocated
1% and the Limited Partners will be allocated 99% of the profits and losses
from operations. 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 remaining economic
interests as provided for in the Partnership Agreement, income allocations
between the partners have been adjusted for financial statement purposes in
1997.
One hundred percent of Net Cash Receipts available for distribution was
distributed to the holders of Interests in proportion to their participating
percentages as of the record date for such distributions. In addition, there
was to be accrued for the benefit of the General Partner as its distributive
share from operations, an amount equivalent to approximately 1% of the total
Net Cash Receipts being distributed, which would be paid only as a part of the
General Partner's share of Net Cash Proceeds. Under certain circumstances, the
General Partner could participate in the Net Cash Proceeds from the sale or
refinancing of Partnership properties. The General Partner's participation is
equal to 15% of further Net Cash Proceeds distributed after holders of
Interests have received a return of Original Capital plus any deficiency in a
Cumulative Distribution of 6% on Adjusted Original Capital, as defined in the
Partnership Agreement. The General Partner will not receive any distributions
of Net Cash Receipts or Net Cash Proceeds in accordance with these provisions.
5. Mortgage Note Payable:
As of December 31, 1996, the Partnership had a mortgage note payable
outstanding of $7,249,433 related to Steeplechase Apartments. This mortgage
note was repaid in connection with the sale of the property during 1997 as
further described in Note 10 of Notes to the Financial Statements.
During 1997, 1996 and 1995, the Partnership incurred and paid interest expense
on non-affiliated mortgage notes payable of $167,177, $3,510,851 and
$4,742,339, respectively.
<PAGE>
6. Management Agreements:
The Partnership's properties were under management agreements with a
third-party management company prior to the sale of the properties. These
management agreements provided for annual fees of 5% of gross operating
receipts.
7. Investment in Joint Venture with an Affiliate:
The Rosehill Pointe Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. The joint venture partner was an affiliate with
investment objectives similar to those of the Partnership. The Partnership and
the affiliate held participating percentages in the joint venture of 38.38% and
61.62%, respectively. In June 1996, the joint venture sold the property in an
all cash sale for $20,700,000. From the proceeds of the sale, the joint venture
paid $15,537,677 to the third party mortgage holders in full satisfaction of
the first and second mortgage loans, and paid $170,250 in selling costs. The
joint venture recognized a gain of $7,920,199 from the sale of this property,
of which $3,055,484 was the Partnership's share. During 1996 and 1995, the
Partnership received distributions of $1,997,578 and $125,528, respectively,
and made a capital contribution of $155,300 to the joint venture in 1996.
The following information has been summarized from the financial statements of
the joint venture:
1996
-----------
Total income $4,967,399
Loss before gain on sale (15,995)
Gain on sale 7,920,199
Net income 7,904,204
8. Tax Accounting:
The Partnership keeps its books in accordance with the Internal Revenue Code,
rules and regulations promulgated thereunder and existing interpretations
thereof. The accompanying financial statements, which are prepared in
accordance with generally accepted accounting principles, will differ from the
tax returns due to the different treatment of various items as specified in the
Internal Revenue Code. The net effect of these accounting differences is that
the net income for 1997 in the financial statements is $2,221,418 less than the
tax income of the Partnership for the same period.
9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended
12/31/97 12/31/96 12/31/95
-------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ ------- ------ ------- ------ -------
<PAGE>
Reimbursement of expenses
to the General Partner
at cost:
Accounting $31,951 $11,118 $16,454 $16,162 $46,401 $2,528
Data processing 6,268 1,105 8,080 3,487 42,184 2,976
Investor communica-
tions None None None None 6,252 None
Legal 18,964 4,640 13,521 13,243 30,317 3,090
Portfolio management 60,741 14,733 64,566 60,741 107,761 11,525
Other 21,301 3,086 21,302 21,301 11,185 1,304
The Partnership participated in an insurance deductible program with other
affiliated partnerships in which the program paid claims up to the amount of
the deductible under the master insurance policies for its properties. The
program was administered by an affiliate of the General Partner who received no
fee for administering the program, however, the General Partner was reimbursed
for expenses. The Partnership paid premiums to the deductible insurance program
of $16,968 and $85,753 in 1996 and 1995, respectively.
The Partnership had a junior loan outstanding from The Balcor Company ("TBC"),
an affiliate of the General Partner, relating to the Chestnut Ridge - Phase I
Apartments. The loan of $1,816,035 along with accrued interest of $48,884 was
forgiven in connection with the sale of the property in September 1996. See
Notes 10 and 12 of Notes to Financial Statements for additional information.
During 1996 and 1995, the Partnership incurred interest expense on the
mortgage note payable-affiliate of $118,488 and $156,835 and paid interest
expense of $130,580 and $175,241, respectively.
During 1996, the Partnership repaid the General Partner loan, which had an
outstanding balance of $11,900,605 plus accrued interest expense payable of
$734,581 at December 31, 1995, with proceeds received from the sales of
properties. The Partnership incurred interest expense of $477,434 and $815,156
and paid interest expense of $1,212,015 and $212,052 on this loan during 1996
and 1995, respectively. Interest expense on the General Partner loan was
computed at the American Express Company cost of funds rate plus a spread to
cover administrative costs. The interest rate was 5.839% at the date of the
loan repayment.
10. Property Sales:
(a) In March 1997, the Partnership sold the Steeplechase Apartments in an all
cash sale for $10,400,000. From the proceeds of the sale, the Partnership paid
$7,238,418 to the third party mortgage holder in full satisfaction of the first
mortgage loan, and paid $184,415 in selling costs and $289,537 in prepayment
penalties. The basis of the property was $5,223,505, which is net of
accumulated depreciation of $3,489,894. For financial statement purposes, the
Partnership recognized a gain of $4,992,080 from the sale of this property.
(b) In November 1996, the Partnership sold the Park Crossing Apartments in an
all cash sale for $11,350,000. From the proceeds of the sale, the Partnership
paid $7,131,987 to the third party mortgage holder in full satisfaction of the
first mortgage loan, paid $191,995 in selling costs and $142,639 in prepayment
penalties. In addition, the Partnership paid a state withholding tax of
<PAGE>
$219,557 on behalf of the Limited Partners 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 $7,282,328, which is net of
accumulated depreciation of $4,328,615. For financial statement purposes, the
Partnership recognized a gain of $3,875,677 from the sale of this property.
(c) In October 1996, the Partnership sold the Willow Bend Lake Apartments in an
all cash sale for $14,350,000. From the proceeds of the sale, the Partnership
paid $9,737,486 to the third party mortgage holder in full satisfaction of the
first mortgage loan, paid $366,660 in selling costs and $389,499 in prepayment
penalties. The basis of the property was $7,745,500, which is net of
accumulated depreciation of $4,896,205. For financial statement purposes, the
Partnership recognized a gain of $6,237,840 from the sale of this property.
(d) In October 1996, the Partnership sold the Marbrisa Apartments in an all
cash sale for $7,800,000. From the proceeds of the sale, the Partnership paid
$5,361,230 to the third party mortgage holder in full satisfaction of the first
mortgage loan and paid $325,361 in selling costs. The basis of the property was
$4,565,345, which is net of accumulated depreciation of $2,706,669. For
financial statement purposes, the Partnership recognized a gain of $2,909,294
from the sale of this property.
(e) In September 1996, the Partnership sold the Hunters Glen Apartments in an
all cash sale for $9,100,000. From the proceeds of the sale, the Partnership
paid $4,541,552 to the third party mortgage holder in full satisfaction of the
first mortgage loan, paid $270,215 in selling costs and $90,832 in prepayment
penalties. The basis of the property was $4,156,017, which is net of
accumulated depreciation of $2,403,728. For financial statement purposes, the
Partnership recognized a gain of $4,673,768 from the sale of this property.
(f) In September 1996, the Partnership sold the Chestnut Ridge - Phase I
Apartments in an all cash sale for $5,513,400. From the proceeds of the sale,
the Partnership paid $3,629,161 to the third party mortgage holder in full
satisfaction of the first mortgage loan, paid $199,601 in selling costs and
$181,458 in prepayment penalties. The Partnership received net proceeds of
$1,503,180 from the sale. However, the terms of the 1994 refinancing of this
property provided that minimum net proceeds of $1,646,000 were to be received
from the sale of this property. As a result, $142,820 was contributed to the
Partnership through an increase to the balance of the junior loan outstanding
from TBC. The basis of the property was $4,336,015, which is net of accumulated
depreciation of $2,622,209. For financial statement purposes, the Partnership
recognized a gain of $977,784 from the sale of this property.
(g) In September 1996, the Partnership sold the Country Oaks Apartments for
$8,250,000. The purchaser of the property took title subject to the existing
first mortgage loan in the amount of $5,946,893 which represents a noncash
transaction to the Partnership. Accordingly, the noncash aspect of this
transaction is not presented in the Partnership's Statements of Cash Flows.
From the proceeds of the sale, the Partnership paid $154,436 in selling costs.
The basis of the property was $4,191,573, which is net of accumulated
depreciation of $2,937,967. For financial statement purposes, the Partnership
recognized a gain of $3,903,991 from the sale of this property.
(h) In June 1996, the Partnership sold the Forest Ridge - Phase II Apartments
<PAGE>
in an all cash sale for $11,100,000. From the proceeds of the sale, the
Partnership paid $7,870,116 to the third party mortgage holder in full
satisfaction of the first mortgage loan, and paid $126,000 in selling costs.
The basis of the property was $7,911,304, which is net of accumulated
depreciation of $4,265,862. For financial statement purposes, the Partnership
recognized a gain of $3,062,696 from the sale of this property.
11. Restricted Investment:
During 1995, a restricted investment of $480,000, which partially
collateralized the Country Oaks mortgage loan, was released. The amount pledged
as collateral had been invested in short-term instruments pursuant to the terms
of the pledge agreement with the lending institution, and the accumulated
interest was paid to the Partnership upon release.
12. Extraordinary Items:
(a) In connection with the sale of the Steeplechase Apartments in 1997, the
Partnership paid $289,537 in prepayment penalties and wrote off the remaining
unamortized deferred expenses related to the property of $132,371. These
amounts were recognized as an extraordinary item and classified as debt
extinguishment expense.
(b) In connection with the sales of properties during 1996, the Partnership
wrote off the remaining unamortized deferred expenses in the amount of
$709,329. In addition, in connection with the sales of the Chestnut Ridge -
Phase I and Hunters Glen, Willow Bend Lake and Park Crossing apartment
complexes, the Partnership paid $804,428 in prepayment penalties. These amounts
were recognized as an extraordinary item and classified as debt extinguishment
expenses.
(c) In June 1996, the joint venture consisting of the Partnership and an
affiliate sold the Rosehill Pointe Apartments. In connection with the sale, the
joint venture wrote off the remaining unamortized deferred expenses. The
Partnership's share of this amount of $20,945 was recognized as an
extraordinary item and classified as debt extinguishment expense.
(d) In connection with the sale of the Chestnut Ridge - Phase I Apartments in
September 1996, the junior loan due to TBC, which had an outstanding balance of
$1,864,919, including accrued interest of $48,884, was forgiven which resulted
in an extraordinary gain on forgiveness of debt.
13. Fair Value of Financial Instruments:
The carrying amounts and fair values of the Partnership's financial instruments
at December 31, 1997 and 1996 are as follows:
The carrying value of cash and cash equivalents, accounts and accrued interest
receivable and accounts payable approximates fair value.
Mortgage note payable: Based on borrowing rates available to the Partnership at
the end of 1996 for mortgage loans with similar terms and maturities, the fair
value of the mortgage note payable approximated the carrying value.
<PAGE>
14. Contingencies:
The Partnership is currently involved in two lawsuits whereby the Partnership
and certain affiliates have been named as defendants alleging substantially
similar claims involving certain state securities and common law violations
with regard to the property acquisition process of the Partnership, and to the
adequacy and accuracy of disclosures of information concerning, as well as
marketing efforts related to the offering of the Limited Partnership Interests
of the Partnership. The defendants continue to vigorously contest these
actions. A plaintiff class has not been certified in either action and, no
determinations of the merits have been made. It is not determinable at this
time whether or not an unfavorable decision in either action would have a
material adverse impact on the financial position, operations or liquidity of
the Partnership. The Partnership believes that it has meritorious defenses to
contest the claims.
15. Subsequent Event:
In January 1998, the Partnership paid $403,462 ($4.81 per Interest) to the
holders of Limited Partnership Interests representing a distribution of
remaining available Net Cash Proceeds.
<PAGE>
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