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 0-15528
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BALCOR PENSION INVESTORS-VII
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(Exact name of registrant as specified in its charter)
Illinois 36-3390487
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 Waukegan Road
Bannockburn, Illinois 60015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 267-1600
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
<PAGE>
PART I
Item 1. Business
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Balcor Pension Investors-VII (the "Registrant") is a limited partnership formed
in 1985 under the laws of the State of Illinois. The Registrant raised
$115,367,500 from sales of Limited Partnership Interests. The Registrant has
retained cash reserves from the disposition of its investments for
contingencies which exist or may arise. The Registrant's operations currently
consist of interest income earned on short-term investments and the payment of
administrative expenses.
The Registrant originally funded eight loans. Two of these loans were repaid,
five properties were acquired through foreclosure and were subsequently sold,
and one of the loans was sold. In addition, one property adjacent to a
property acquired through foreclosure was purchased by the Registrant and
subsequently sold. As of December 31, 1997, the Registrant has disposed of all
of its investments.
The Partnership Agreement provides for the dissolution of the Registrant upon
the occurrence of certain events, including the disposition of all interests in
real estate. During 1996, the Registrant sold four properties. During 1997, the
Registrant sold its remaining three real estate investments, the U.S. West
Direct Center Office Building, the Butler Plaza Shopping Center and the loan
collateralized by Whispering Hills Apartments, which was accounted for as real
estate held for sale. The Registrant has retained a portion of the cash from
the property sales to satisfy obligations of the Registrant as well as
establish a reserve for contingencies. The timing of the termination of the
Registrant and final distribution of cash will depend upon the nature and
extent of liabilities and contingencies which exist or may arise. Such
contingencies may include legal and other fees and costs stemming from
litigation involving the Registrant, including, but not limited to, the lawsuit
discussed in "Item 3. Legal Proceedings". In the absence of any contingency,
the reserves will be paid within twelve months of the last property being sold.
In the event a contingency continues to exist or arises, reserves may be held
by the Registrant for a longer period of time.
During 1997, the Registrant sold the U.S. West Direct Center Office Building,
the Butler Plaza Shopping Center and the loan collateralized by Whispering
Hills Apartments, which was accounted for as real estate held for sale, in all
cash sales for $14,250,000, $5,200,000, and $17,200,000, respectively. 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 Mortgage Advisors-VII, the General Partner
of the Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.
<PAGE>
Other Information
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In April 1997, the Registrant sold the U.S. West Direct Center Office Building
to a third party. At closing, pursuant to the agreement of sale, $560,000 of
the sale proceeds was placed in escrow and will be held through October 31,
1998 for the payment of costs relating to the removal of soil contamination at
the property. The General Partner believes that the Registrant will have no
further liability relating to the environmental issues at the property.
Item 2. Properties
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As of December 31, 1997, the Registrant did not own any properties.
In the opinion of the General Partner, the Registrant has obtained adequate
insurance coverage.
See Notes to Financial Statements for other information regarding former real
estate property investments.
Item 3. Legal Proceedings
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Dee vs. Walton Street Capital Acquisition II, LLC
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On June 14, 1996, a proposed class and derivative action complaint was filed,
Dee vs. Walton Street Capital Acquisition II, LLC (Circuit Court of Cook
County, Illinois, County Department, Chancery Division ("Chancery Court"), Case
No. 96 CH 06283) (the "Dee Case"), naming the General Partner and the general
partners (the "Balcor Defendants") of nine other limited partnerships sponsored
by The Balcor Company (together with the Registrant, the "Affiliated
Partnerships"), as well as the Affiliated Partnerships, as defendants.
Additional defendants were Insignia Management Group ("Insignia") and Walton
Street Capital Acquisition II, LLC ("Walton") and certain of their affiliates
and principals (collectively, the "Walton and Insignia Defendants"). The
complaint alleged, among other things, that the tender offers for the purchase
of limited partnership interests in the Affiliated Partnerships made by a joint
venture consisting of affiliates of Insignia and Walton were coercive and
unfair.
On July 1, 1996, another proposed class action complaint was filed in the
Chancery Court, Anderson vs. Balcor Mortgage Advisors (Case No. 96 CH 06884)
(the "Anderson Case"). An amended complaint consolidating the Dee and Anderson
Cases (the "Dee/Anderson Case") was filed on July 25, 1996.
The complaint seeks to assert class and derivative claims against the Walton
and Insignia Defendants and alleges that, in connection with the tender offers,
the Walton and Insignia Defendants misused the Balcor Defendants' and
Insignia's fiduciary positions and knowledge in breach of the Walton and
Insignia Defendants' fiduciary duty and in violation of the Illinois Securities
and Consumer Fraud Acts. The plaintiffs amended their complaint on October 8,
<PAGE>
1996, adding additional claims. The plaintiffs requested certification as a
class and derivative action, unspecified compensatory damages and rescission of
the tender offers. Each of the defendants filed motions to dismiss the
complaint for failure to state a cause of action. On January 7, 1997, the
Chancery Court denied the plaintiffs' motion for leave to amend the complaint
and dismissed the matter for failure to state a cause of action, with
prejudice.
On February 3, 1997, the plaintiffs filed a Notice of Appeal of the Chancery
Court's order to the Appellate Court of Illinois. Plaintiff's brief was filed
with the Appellate Court in September 1997. Defendants filed their reply briefs
in January 1998. Oral arguments before the Appellate Court were held on March
18, 1998. The Appellate Court is expected to issue its opinion in the spring of
1998, although there can be no assurances on such date.
The Balcor Defendants intend to vigorously contest this action. No class has
been certified as of this date. The Registrant believes it has meritorious
defenses to contest the claims. It is not determinable at this time whether or
not an unfavorable decision in this action would have a material adverse impact
on the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of the Limited Partners of the Registrant
during 1997.
<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 previous 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 15,021.
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 $1,580,407 $8,479,046 $7,382,764 $9,012,908 $7,000,942
Recovery of losses on
loans, real estate
and accrued interest
receivable None 2,080,943 None 1,137,000 None
Provision for
potential losses on
loans, real estate
and accrued interest
receivable None 3,935,000 None 1,137,000 4,150,000
Income before extra-
ordinary item 8,240,101 7,248,516 5,424,542 6,238,369 2,400,958
Net income 8,240,101 7,167,815 5,424,542 6,238,369 2,400,958
Net income per
Limited Partnership
Interest-Basic and
Diluted 13.53 13.97 10.58 12.17 4.68
Total assets 2,009,724 43,826,611 94,180,552 89,991,386 90,585,381
Mortgage note
payable None None 4,887,630 4,941,641 4,991,956
Distributions per
Limited Partnership
Interest (A) 99.10(B) 72.16 20.48 12.00 12.00
(A) These amounts include distributions of original capital of $92.60, $58.16
and $11.48 per Limited Partnership Interest for the years 1997, 1996 and 1995,
respectively.
(B) In addition to the distributions noted above, a special distribution of
$0.22 per Interest was paid to class members including certain current
investors in the Partnership pursuant to the settlement of a class action
lawsuit.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Operations
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Summary of Operations
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Balcor Pension Investors - VII (the "Partnership") sold four real estate
investments during 1996 and sold its remaining three real estate investments in
1997. These sales resulted in a decrease in income from operations of real
estate held for sale during 1997 as compared to 1996 and during 1996 as
compared to 1995. The Partnership recognized net gains during 1997 and 1996
for financial statement purposes in connection with these sales. The
Partnership recognized a recovery of a previously established loss allowance
related to the sale of Sand Pebble Village - Phase I Apartments during 1996 and
also recognized a provision for potential losses related to the Butler Plaza
Shopping Center during 1996. The combined effect of these events resulted in
an increase in net income during 1997 as compared to 1996 and during 1996 as
compared to 1995. Further discussion of the Partnership's operations is
summarized below.
1997 Compared to 1996
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Income from operations of real estate held for sale represents the net
operations of the properties acquired by the Partnership through foreclosure.
The Partnership sold the Sand Pebble Village - Phases I and II, Hickory Creek
and Jonathan's Landing apartment complexes during 1996 and the Butler Plaza
Shopping Center, the U.S. West Direct Center Office Building and the loan
collateralized by Whispering Hills Apartments during 1997. The loan
collateralized by Whispering Hills Apartments was accounted for as real estate
held for sale. All of these properties were generating income from operations
prior to their sales. As a result, income from operations of real estate held
for sale decreased during 1997 as compared to 1996.
The Partnership had lower average cash balances during 1997 due to less
proceeds received from property sales than in 1996. This resulted in a
decrease in interest income on short-term investments during 1997 as compared
to 1996.
Provisions for potential loss were charged to income when the General Partner
believed an impairment had occurred to the value of its properties.
Determinations of fair value were made periodically on the basis of assessments
of property operations and the property's estimated sales price less closing
costs. Determinations of fair value represented estimations based on many
variables which affect the value of real estate, including economic and
demographic conditions. During 1997, the Partnership wrote off $3,935,000 of a
previously established loss allowance in connection with the sale of the Butler
Plaza Shopping Center. During 1996, the Partnership recognized a provision for
potential loss of $3,935,000 to provide for a decline in the estimate of the
<PAGE>
fair value of the Butler Plaza Shopping Center. During 1996, the Partnership
also recognized a recovery of $2,080,943 and wrote off $2,456,057 of a
previously established loss allowance as a result of the sale of Sand Pebble
Village Apartments - Phase I. The minority joint venture partner's share of
the recovery was $928,725.
The Partnership recognized other income during 1997 in connection with refunds
of prior years' insurance premiums relating to the Partnership's properties.
The Partnership incurred higher consulting, investor processing, printing and
postage costs in connection with its response to a tender offer during 1996. As
a result, administrative expense decreased during 1997 as compared to 1996.
During 1997, the Partnership sold the U.S. West Direct Center Office Building,
the Butler Plaza Shopping Center and the loan collateralized by Whispering
Hills Apartments, which was accounted for as real estate held for sale and
recognized net gains totaling $7,887,309 in connection with these sales for
financial statement purposes. During 1996, the Partnership sold the Sand
Pebble Village - Phases I and II, Jonathan's Landing and Hickory Creek
apartment complexes and recognized net gains totaling $8,104,310 in connection
with these sales.
The Jonathan's Landing, Sand Pebble Village - Phases I and II and Whispering
Hills apartment complexes were owned by joint ventures with affiliates. During
1996 the Partnership recognized gains on the sales of the Sand Pebble Village -
Phase II and the Jonathan's Landing apartment complexes, the minority joint
venture partner's share of which was $1,097,289 and $999,473, respectively. In
addition, the Partnership recognized a recovery of a previously established
loss allowance in connection with the sale of the Sand Pebble Village
Apartments - Phase I, the minority joint venture partner's share of which was
$928,725. The combined effect of these events resulted in a decrease in
affiliates' participation in income from joint ventures during 1997 as compared
to 1996. This decrease was partially offset by a gain recognized on the 1997
sale of the Whispering Hills Apartments, the minority joint venture partner's
share of which was $499,141.
In connection with the 1996 sale of Sand Pebble Village Apartments - Phase II,
the Partnership incurred a prepayment penalty of $145,775 which was recognized
as debt extinguishment expense and classified as an extraordinary item. The
minority joint venture partner's share of the extraordinary item was $65,074.
1996 Compared to 1995
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Interest income on loans receivable ceased in July 1995 as a result of the
foreclosure of the Jonathan's Landing Apartments' loan. As a result, interest
income on loans receivable ceased during 1996 as compared to 1995.
During 1996, income from operations of real estate held for sale represented
the net operations of seven properties, four of which were sold during 1996.
Original funds advanced by the Partnership totaled approximately $37,775,000
for the three remaining properties. The property sales resulted in a decrease
in income from operations of real estate held for sale of approximately
$1,305,000 during 1996 as compared to 1995. The Partnership acquired the
<PAGE>
Jonathan's Landing Apartments through foreclosure in July 1995. The
Partnership recognized its share of the additional income generated by the
property in 1996 of approximately $503,000, which partially offset this
decrease.
As a result of higher cash balances due to proceeds received from the 1996
property sales and held by the Partnership prior to distribution to Limited
Partners in October 1996, interest income on short-term investments increased
in 1996 as compared to 1995.
The Partnership incurred higher legal, consulting, printing, postage and
investor processing costs in connection with its response to a tender offer
during the second quarter of 1996. As a result, administrative expenses
increased during 1996 as compared to 1995.
During 1996, the Partnership recognized gains on the sales of the Sand Pebble
Village - Phase II and Jonathan's Landing apartment complexes and recognized a
recovery of a previously established loss allowance in connection with the sale
of the Sand Pebble Village Apartments - Phase I. These properties were owned
through joint ventures with affiliates. As a result, affiliates' participation
in income from joint ventures increased during 1996 as compared to 1995.
Liquidity and Capital Resources
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The cash position of the Partnership decreased by approximately $15,314,000 as
of December 31, 1997, when compared to December 31, 1996 primarily due to the
distributions to Limited Partners of the proceeds from the 1996 and 1997
property sales which were partially offset by the proceeds received from the
1997 property sales. Operating activities provided cash flow of approximately
$1,079,000 from the operations of the Partnership's properties and interest
income earned on short-term investments, offset by the payment of
administrative expenses. Investing activities consisted of net proceeds
received from the sales of the U.S. West Direct Center Office Building, the
Butler Plaza Shopping Center, and the loan collateralized by Whispering Hills
Apartments totaling approximately $34,243,000, less the costs of improvements
to the U.S. West Direct Center Office Building of approximately $370,000.
Financing activities consisted primarily of the payment of distributions to
Limited Partners totaling approximately $45,805,000 and distributions to the
joint venture partners - affiliates totaling approximately $4,244,000.
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 four properties. During 1997,
the Partnership sold its remaining three real estate investments, the U.S. West
Direct Center Office Building, the Butler Plaza Shopping Center and the loan
collateralized by Whispering Hills Apartments, which was accounted for as real
estate held for sale. 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
<PAGE>
contingencies may include legal and other fees and costs stemming from
litigation involving the Partnership, including, but not limited to, the
lawsuit discussed in "Item 3. Legal Proceedings". In the absence of any
contingency, the reserves will be paid within twelve months of the last
property being sold. In the event a contingency continues to exist or arises,
reserves may be held by the Partnership for a longer period of time.
In April 1997, the Partnership sold the U.S. West Direct Center Office Building
in an all cash sale for $14,250,000. From the proceeds of the sale, the
Partnership paid $324,819 in selling costs. Pursuant to the terms of the sale,
$1,100,000 of the proceeds was placed in escrow. Of this amount, $540,000 was
returned to the Partnership in September 1997. The remaining $560,000
continues to be held in escrow to be used for the payment of costs relating to
the removal of soil contamination at the property and has been recorded as a
reduction in the sales price of the property for financial statement purposes.
This amount will remain in escrow until the earlier of October 31, 1998 or such
time as the environmental issues at the property are corrected. After payment
of any amounts needed to correct the environmental issues at the property, the
Partnership is entitled to receive all amounts remaining in the escrow which
will be recorded as income when received. The remainder of the available
proceeds were distributed to the Limited Partners in July 1997. See Note 10 of
Notes to the Financial Statements for additional information.
In 1996, the Partnership was awarded $300,300 in connection with the
condemnation of a portion of the land at the Butler Plaza Shopping Center. The
Partnership as well as tenants at the property are parties to the condemnation
proceedings. In 1997, the Partnership agreed to resolve the land condemnation
for an additional $367,850. The Partnership received $113,900 in 1996, which
was recorded as a reduction to the carrying value of the property. Of the
remaining $554,250, $189,400 is being held pending receipt of consents from
certain tenants at the property and is expected to be paid to the Partnership
during the second quarter of 1998. The remaining $364,850 is expected to be
paid to the Partnership upon the resolution of certain issues with the tenants
in the condemnation proceedings. Amounts will be recorded as income when
received.
In May 1997, the Partnership sold the Butler Plaza Shopping Center in an all
cash sale for $5,200,000. From the proceeds of the sale, the Partnership paid
$378,790 in selling costs. The net available proceeds were distributed to the
Limited Partners in July 1997. See Note 10 of Notes to the Financial Statements
for additional information.
The loan collateralized by the Whispering Hills Apartments, which was accounted
for as real estate held for sale, was owned by a joint venture consisting of
the Partnership and an affiliate. In June 1997, the joint venture sold the loan
in an all cash sale for $17,200,000. From the proceeds of the sale, the joint
venture paid $750,000 to the borrower in accordance with an amendment to the
modified loan agreement and $393,305 in selling costs. The net proceeds of the
sale were $16,056,695, of which $12,042,521 was the Partnership's share. The
Partnership's share of the proceeds was distributed to Limited Partners in
October 1997.
Pursuant to the sale agreement for the Hickory Creek Apartments, $250,000 of
the sale proceeds was retained by the Partnership and was unavailable for
distribution until March 1997, at which time the funds were released in full.
In February 1997, the General Partner made a settlement payment of $103,831
($0.22 per $250 Interest) to members of the class pursuant to the settlement
<PAGE>
approved by the court in November 1996 in the Paul Williams and Beverly
Kennedy, et al, v. Balcor Pension Investors, et al. class action lawsuit. The
General Partner made a contribution of $115,368 to the Partnership from which
the plaintiff's counsel received $11,537 pursuant to the settlement agreement.
Of the remaining settlement amount, $72,839 was paid to original investors who
held their Limited Partnership Interests at the date of the settlement and was
recorded as a distribution to Limited Partners in the Financial Statements.
The remaining portion of the settlement of $30,992 was paid to original
investors who previously had sold their Interests in the Partnership. This
amount was recorded as an administrative expense in the Financial Statements.
Similar contributions and payments were made on the seven other partnerships
included in the lawsuit in addition to those payments described above. The
Balcor Company paid an additional $635,000 to the plaintiffs' class counsel and
The Balcor Company received approximately $946,000 from the eight partnerships
as a reimbursement of its legal expenses, of which $90,979 was the
Partnership's share.
In February 1997, the Partnership discontinued the repurchase of Interests from
Limited Partners. As of December 31, 1997, there were 18,456 Interests and
cash of $1,577,712 in the Early Investment Incentive Fund.
The Partnership made four distributions in each of 1997, 1996 and 1995 totaling
$99.10, $72.16 and $20.48 per Limited Partnership Interest, respectively. See
Statements of Partners' Capital for additional information. Distributions per
Interest were comprised of $6.50 of Cash Flow and $92.60 of Mortgage Reductions
in 1997, $14.00 of Cash Flow and $58.16 of Mortgage Reductions in 1996, $9.00
of Cash Flow and $11.48 of Mortgage Reductions for 1995.
To date, Limited Partners have received distributions of $123.06 of Cash Flow
from operations and a return of Original Capital of $187.09, totaling $310.15
per $250 Interest. The Partnership expects to distribute any proceeds
available from the U.S. West Direct Center Office Building escrow and the
Butler Plaza Shopping Center land condemnation proceeds. Thereafter, no
additional distributions are anticipated to be made prior to the termination of
the Partnership. However, after paying final partnership expenses, any
remaining cash reserves will be distributed.
Item 8. Financial Statements and Supplementary Data
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See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
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Financial Disclosure
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There have been no changes in or disagreements with accountants on any matter
of accounting principles, practices or financial statement disclosure.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
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(a) Neither the Registrant nor Balcor Mortgage Advisors-VII, its General
Partner, has a Board of Directors.
(b, c & e) The names, ages and business experience of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:
TITLE OFFICERS
Chairman, President and Chief Thomas E. Meador
Executive Officer
Senior Vice President Alexander J. Darragh
Senior Vice President John K. Powell, Jr.
Senior Managing Director, Chief Jayne A. Kosik
Financial Officer, Treasurer
and Assistant Secretary
Thomas E. Meador (age 50) joined Balcor in July 1979. He is Chairman,
President and Chief Executive Officer and has responsibility for all ongoing
day-to-day activities at Balcor. He is a member of the board of directors of
The Balcor Company. He is also Senior Vice President of American Express
Company and is responsible for its real estate operations worldwide. Prior to
joining Balcor, Mr. Meador was employed at the Harris Trust and Savings Bank in
the commercial real estate division where he was involved in various lending
activities. Mr. Meador received his M.B.A. degree from the Indiana University
Graduate School of Business.
Alexander J. Darragh (age 43) joined Balcor in September 1988 and is
responsible for real estate advisory services for Balcor and American Express
Company. Mr. Darragh received masters' degrees in Urban Geography from Queen's
University and in Urban Planning from Northwestern University.
John K. Powell Jr. (age 47) joined Balcor in September 1985 and is responsible
for portfolio and asset management matters relating to Balcor's partnerships.
Mr. Powell also has supervisory responsibility for Balcor's risk management
function. He is a member of the board of directors of The Balcor Company. He
received a Master of Planning degree from the University of Virginia. Mr.
Powell has been designated a Certified Real Estate Financier by the National
Society for Real Estate Finance and is a full member of the Urban Land
Institute.
Jayne A. Kosik (age 40) joined Balcor in August 1982 and, as Chief Financial
Officer, is responsible for Balcor's financial, human resources and treasury
functions. From June 1989 until October 1996, Ms. Kosik had supervisory
responsibility for accounting functions relating to Balcor's public and private
partnerships. She is also Treasurer and a Senior Managing Director of The
Balcor Company. Ms. Kosik is a Certified Public Accountant.
(d) There is no family relationship between any of the foregoing officers.
<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 $3,569 in 1997 with respect to one of the executive
officers and directors of Balcor Mortgage Advisors - VII, the General Partner.
The Registrant has not paid and does not intend 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 Mortgage Advisors-VII, principally through the Early Investment
Incentive Fund, 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 18,456 Interests 4%
Interests
Relatives of the officers and affiliates of the partners of the General Partner
do not own any 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 additional information relating
to transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
<PAGE>
PART IV
Item 14. Exhibits 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,
previously filed as Exhibit 3 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-11 dated March 6, 1986 (Registration No.
33-01630), is incorporated herein by reference.
(4) Form of Subscription Agreement previously filed as Exhibit 4.1 to Amendment
No. 1 to the Registrant's Registration Statement on Form S-11 dated March 6,
1986 (Registration No. 33-01630) and Form of Confirmation regarding Interests
in the Registrant set forth as Exhibit 4.2 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1992 (Commission File No. 0-15528)
are incorporated herein by reference.
(10) Material Contracts:
(a)(i) Agreement of Sale and attachment thereto relating to the sale of the
U.S. West Office Building, Murray, Utah, previously filed as Exhibit (99) to
the Registrant's Current Report on Form 8-K dated January 14, 1997, is
incorporated herein by reference.
(a)(ii) First Amendment to Agreement of Sale relating to the sale of the
U.S. West Office Building, Murray, Utah, previously filed as Exhibit
(10)(a)(ii) to the Registrant's Annual Report on Form 10-K dated December 31,
1996, is incorporated herein by reference.
(a)(iii) Second Amendment to Agreement of Sale relating to the sale of
the U.S. West Office Building, Murray, Utah, previously filed as Exhibit
(10)(a)(iii) to the Registrant's Annual Report on Form 10-K dated December 31,
1996, is incorporated herein by reference.
(a)(iv) Third Amendment to Agreement of Sale relating to the sale of the U.S.
West Office Building, Murray, Utah, previously filed as Exhibit (10)(a)(iv) to
the Registrant's Annual Report on Form 10-K dated December 31, 1996, is
incorporated herein by reference.
(b) Agreement of Sale and attachments thereto relating to the sale of Sand
Pebble Village Apartments - Phase I 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.
(c) Agreement of Sale and attachments thereto relating to the sale of Sand
Pebble Village Apartments - Phase II previously filed as Exhibit (2)(b) to the
Registrant's Current Report on Form 8-K dated June 28, 1996, is incorporated
herein by reference.
<PAGE>
(d)(i) Agreement of Sale and attachments thereto relating to the sale of
Hickory Creek Apartments previously filed as Exhibit (10)(i) to the
Registrant's Quarterly Report on Form 10-Q dated June 30, 1996, is incorporated
herein by reference.
(d)(ii) Letter Agreement dated August 14, 1996, relating to the sale of Hickory
Creek Apartments previously filed as Exhibit (10)(c)(ii) to the Registrant's
Quarterly Report on Form 10-Q dated September 30, 1996 is incorporated herein
by reference.
(e)(i) Agreement of Sale and attachment thereto relating to the sale of
Jonathan's Landing Apartments previously filed as Exhibit (2) to the
Registrant's Current Report on Form 8-K dated August 30, 1996, is incorporated
herein by reference.
(e)(ii) First Amendment to the Agreement of Sale relating to the sale of
Jonathan's Landing Apartments previously filed as Exhibit (10)(d)(ii) to the
Registrant's Quarterly Report on Form 10-Q dated September 30, 1996 is
incorporated herein by reference.
(f)(i) Agreement of Sale and attachment thereto relating to the sale of Butler
Plaza Shopping Center, Orlando, Florida, previously filed as Exhibit (10)(f) to
the Registrant's Annual Report on Form 10-K dated December 31, 1996, is
incorporated herein by reference.
(f)(ii) First Amendment to Agreement of Sale and Escrow Agreement relating to
the sale of Butler Plaza Shopping Center, Orlando, Florida, previously filed as
Exhibit (10)(f)(ii) to the Registrant's Quarterly Report on Form 10-Q dated
March 31, 1997, is incorporated herein by reference.
(g)(i) Agreement to Purchase Loan Documents relating to the sale of the loan
collateralized by the Whispering Hills Apartments, Overland Park, Kansas,
previously filed as Exhibit (10)(g) to the Registrant's Quarterly Report on
Form 10-Q dated March 31, 1997, is incorporated herein by reference.
(g)(ii) First Amendment to Agreement to Purchase Loan Documents related to the
sale of the loan collateralized by the Whispering Hills Apartments, Overland
Park, Kansas, previously filed as Exhibit (10)(g)(ii) to the Registrant's
Quarterly Report on Form 10-Q dated June 30, 1997, 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 on Form 8-K were filed by the Registrant
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 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALCOR PENSION INVESTORS-VII
By:/s/Jayne A. Kosik
--------------------------------
Jayne A. Kosik
Senior Managing Director and Chief
Financial Officer (Principal Accounting
Officer) of Balcor Mortgage
Advisors-VII, the General Partner
Date: March 27, 1998
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ---------------------- --------------------------------- --------------
President and Chief Executive
Officer (Principal Executive
Officer) of Balcor Mortgage
Advisors-VII, the General Partner
/s/Thomas E. Meador March 27, 1998
- -------------------- --------------
Thomas E. Meador
Senior Managing Director and Chief
Financial Officer (Principal
Accounting Officer) of Balcor Mortgage
Advisors-VII, the General Partner
/s/Jayne A. Kosik March 27, 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, 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 Pension Investors-VII:
We have audited the financial statements of Balcor Pension Investors-VII (An
Illinois Limited Partnership) as listed in the Index of this Form 10-K. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Balcor Pension Investors-VII
(An Illinois 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 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 assets. 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 25, 1998
<PAGE>
BALCOR PENSION INVESTORS - VII
(AN ILLINOIS LIMITED PARTNERSHIP)
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
------------ ------------
Cash and cash equivalents $ 1,983,142 $ 17,297,262
Accounts and accrued interest receivable 26,582 411,712
Prepaid expenses 61,204
Deferred expenses, net of accumulated
amortization of $177,082 in 1996 70,174
------------ ------------
2,009,724 17,840,352
------------ ------------
Real estate held for sale (net of
allowance of $3,935,000 in 1996) 25,986,259
------------ ------------
$ 2,009,724 $ 43,826,611
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 24,673 $ 251,125
Due to affiliates 41,771 88,416
Accrued real estate taxes 106,465
Security deposits 70,823
------------ ------------
Total liabilities 66,444 516,829
------------ ------------
Commitments and contingencies
Affiliates' participation in joint venture 3,584,170
Limited Partners' capital (461,470
Interests issued and outstanding) 2,058,244 41,621,252
General Partner's deficit (114,964) (1,895,640)
------------ ------------
Total partners' capital 1,943,280 39,725,612
------------ ------------
$ 2,009,724 $ 43,826,611
============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS - VII
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL
for the years ended December 31, 1997, 1996, and 1995
Partners' Capital (Deficit) Accounts
-----------------------------------------
General Limited
Total Partner Partners
------------- ------------ --------------
Balance at December 31, 1994 $ 71,063,147 $ (1,975,564)$ 73,038,711
Cash distributions to:
Limited Partners (A) (9,450,906) (9,450,906)
General Partner (461,470) (461,470)
Net income for the year
ended December 31, 1995 5,424,542 542,454 4,882,088
------------- ------------ --------------
Balance at December 31, 1995 66,575,313 (1,894,580) 68,469,893
Cash distributions to:
Limited Partners (A) (33,299,674) (33,299,674)
General Partner (717,842) (717,842)
Net income for the year
ended December 31, 1996 7,167,815 716,782 6,451,033
------------- ------------ --------------
Balance at December 31, 1996 39,725,612 (1,895,640) 41,621,252
Cash distributions to:
Limited Partners (A) (45,804,516) (45,804,516)
General Partner (333,285) (333,285)
Cash contribution 115,368 115,368
Net income for the year
ended December 31, 1997 8,240,101 1,998,593 6,241,508
------------- ------------ --------------
Balance at December 31, 1997 $ 1,943,280 $ (114,964)$ 2,058,244
============= ============ ==============
(A) Summary of cash distributions paid per Limited Partnership Interest:
1997 1996 1995
------------- --------------- ------------
First Quarter $24.00(B) $3.00 $5.15
Second Quarter 9.90 5.16 2.00
Third Quarter 37.00 3.00 10.33
Fourth Quarter 28.20 61.00 3.00
(B) In addition to the distribution noted above, a special distribution
of $0.22 per Interest was paid to class members including certain
current investors in the Partnership pursuant to the settlement of a
a class action lawsuit.
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS - VII
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996, and 1995
1997 1996 1995
------------- ------------ --------------
Income:
Interest on loans
receivable, net of
amortization of loan
application and processing
fees of $156,676 in 1995 $ 323,053
Income from operations of
real estate held for sale $ 917,073 $ 5,629,880 6,431,686
Interest on short-term
investments 659,774 768,223 628,025
Recovery of losses on
real estate 2,080,943
Other income 3,560
------------- ------------ --------------
Total income 1,580,407 8,479,046 7,382,764
------------- ------------ --------------
Expenses:
Provision for potential
losses on real estate 3,935,000
Administrative 567,821 880,486 639,708
------------- ------------ --------------
Total expenses 567,821 4,815,486 639,708
------------- ------------ --------------
Income before gain on sales,
affiliates' participation in
income of joint ventures and
extraordinary item 1,012,586 3,663,560 6,743,056
Net gain on sales of real estate 7,887,309 8,104,310
Affiliates' participation in
income of joint ventures (659,794) (4,519,354) (1,318,514)
------------- ------------ --------------
Income before extraordinary
item 8,240,101 7,248,516 5,424,542
------------- ------------ --------------
Extraordinary item:
Debt extinguishment expense (145,775)
Affiliate's participation in
debt extinguishment expense 65,074
------------
Total extraordinary item (80,701)
------------- ------------ --------------
Net income $ 8,240,101 $ 7,167,815 $ 5,424,542
============= ============ ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS - VII
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME AND EXPENSES
for the years ended December 31, 1997, 1996, and 1995
(Continued)
1997 1996 1995
------------- ------------ --------------
Income before extraordinary item
allocated to General Partner $ 1,998,593 $ 724,852 $ 542,454
============= ============ ==============
Income before extraordinary item
allocated to Limited Partners $ 6,241,508 $ 6,523,664 $ 4,882,088
============= ============ ==============
Income before extraordinary item
per Limited Partnership Interest
(461,470 issued and outstanding)
- Basic and Diluted $ 13.53 $ 14.13 $ 10.58
============= ============ ==============
Extraordinary item allocated to
General Partner None $ (8,070) None
============= ============ ==============
Extraordinary item allocated to
Limited Partners None $ (72,631) None
============= ============ ==============
Extraordinary item allocated per
Limited Partnership Interest
(461,470 issued and outstanding)
- Basic and Diluted None $ (0.16) None
============= ============ ==============
Net income allocated to
General Partner $ 1,998,593 $ 716,782 $ 542,454
============= ============ ==============
Net income allocated to
Limited Partners $ 6,241,508 $ 6,451,033 $ 4,882,088
============= ============ ==============
Net income allocated per Limited
Partnership Interest (461,470
issued and outstanding) -
Basic and Diluted $ 13.53 $ 13.97 $ 10.58
============= ============ ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS - VII
(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 $ 8,240,101 $ 7,167,815 $ 5,424,542
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Affiliates'
participation in income
of joint ventures 659,794 4,519,354 1,318,514
Affiliate's participation
in debt extinquishment
expense (65,074)
Net gain on sales of
real estate (7,887,309) (8,104,310)
Amortization of
deferred expenses 215,662 25,522 26,849
Amortization of loan
application and
processing fees 156,676
Recovery of losses on
real estate (2,080,943)
Provision for potential
losses on real estate 3,935,000
Payment of leasing
commissions (145,488) (68,662)
Net change in:
Escrow deposits 80,519 2,312
Accounts and accrued
interest receivable 385,130 (223,074) 99,754
Prepaid expense 61,204 59,698 (120,902)
Accounts payable (226,452) 1,493 35,590
Due to affiliates (46,645) 61,800 (43,236)
Accrued liabilities (106,465) (175,311) 22,004
Security deposits (70,823) (339,795) 35,923
------------- ------------ --------------
Net cash provided by
operating activities 1,078,709 4,862,694 6,889,364
------------- ------------ --------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS - VII
(AN ILLINOIS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996, and 1995
(Continued)
1997 1996 1995
------------- ------------ --------------
Investing activities:
Proceeds relating to land
condemnation $ 113,900
Proceeds from sales of
real estate $ 35,340,000 67,100,000
Payment of selling costs (1,096,914) (1,850,620)
Costs incurred in connection
with real estate acquired
through foreclosure $ (283,490)
Improvements to properties (369,518)
------------- ------------ --------------
Net cash provided by or used
in investing activities 33,873,568 65,363,280 (283,490)
------------- ------------ --------------
Financing activities:
Distributions to Limited
Partners (45,804,516) (33,299,674) (9,450,906)
Distributions to General
Partner (333,285) (717,842) (461,470)
Contribution by General Partner 115,368
Distributions to joint
venture partners -
affiliates (4,243,964) (22,619,077) (1,238,784)
Repayment of mortgage
note payable (4,859,155) (54,011)
Principal payments on mortgage
note payable (28,475)
------------- ------------ --------------
Net cash used in financing
activities (50,266,397) (61,524,223) (11,205,171)
------------- ------------ --------------
Net change in cash and cash
equivalents (15,314,120) 8,701,751 (4,599,297)
Cash and cash equivalents at
beginning of year 17,297,262 8,595,511 13,194,808
------------- ------------ --------------
Cash and cash equivalents at
end of year $ 1,983,142 $ 17,297,262 $ 8,595,511
============= ============ ==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
BALCOR PENSION INVESTORS-VII
(An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Partnership's Business:
Balcor Pension Investors-VII (the "Partnership") has retained cash reserves
from the disposition of its 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 four properties. During 1997,
the Partnership sold its remaining three real estate investments, the U.S. West
Direct Center Office Building, the Butler Plaza Shopping Center and the loan
collateralized by Whispering Hills Apartments, which was accounted for as real
estate held for sale. The Partnership has retained a portion of the cash from
the property sales to satisfy obligations of the Partnership as well as
establish a reserve for contingencies. The timing of the termination of the
Partnership and final distribution of cash will depend upon the nature and
extent of liabilities and contingencies which exist or may arise. Such
contingencies may include legal and other fees and costs stemming from
litigation involving the Partnership, including, but not limited to, the
lawsuit discussed in Note 14 of Notes to Financial Statements. In the absence
of any contingency, the reserves will be paid within twelve months of the last
property being sold. In the event a contingency 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) Income on loans was recorded as earned in accordance with the terms of the
related loan agreements. The accrual of interest was discontinued when a loan
became ninety days contractually delinquent or sooner when, in the opinion of
the General Partner, an impairment occurred in the value of the collateral
property securing the loan. Income on nonaccrual loans or loans which were
otherwise not performing in accordance with their terms was recorded on a cash
basis.
Various loan agreements provided for participation by the Partnership in
increases in value of the collateral property when the loan was repaid or
refinanced. In addition, certain loan agreements allowed the Partnership to
receive a percentage of rental income exceeding a base amount. Participation
income was reflected in the accompanying Statements of Income and Expenses when
received.
<PAGE>
Income from operations of real estate held for sale was reflected in the
accompanying Statements of Income and Expenses net of related direct operating
expenses.
(c) Loan losses on mortgage notes receivable were charged to income and an
allowance account was established when the General Partner believed the loan
balance would not be recovered. The General Partner assessed the collectibility
of each loan on a periodic basis through a review of the collateral property
operations, the property value and the borrower's ability to repay the loan.
Upon foreclosure, the loan net of the allowance was transferred to real estate
held for sale after the fair value of the property, less costs of disposal was
assessed. Upon the transfer to real estate held for sale, a new basis in the
property was established.
Effective January 1, 1995 the Partnership adopted Statement of Financial
Accounting Standards, No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of". Under SFAS 121,
the General Partner periodically assessed, but not less than on an annual
basis, the fair value of its real estate properties held for sale. The General
Partner estimated the fair value of its properties based on the current sales
price less estimated closing costs. Changes in the property's fair value were
recorded by an adjustment to the property allowance account and were recognized
in the income statement as an increase or decrease through recovery income or a
provision for loss in the period the change in fair value was determined. The
General Partner considered the methods referred to above to result in a
reasonable measurement of a property's fair value, unless other factors
affecting the property's value indicated otherwise.
(d) Deferred expenses consisted of loan application and processing fees and
mortgage brokerage fees which were amortized over the terms of the respective
agreements, and leasing commissions which were amortized over the life of each
respective lease. Upon disposition of a loan or property, the remaining
unamortized balance was recognized as amortization expense.
(e) Revenue was recognized on an accrual basis in accordance with generally
accepted accounting principles. Income from operating leases with significant
abatements and/or scheduled rent increases was recognized on a straight line
basis over the term of the respective lease. Service income included
reimbursements for operating costs such as real estate taxes, maintenance and
insurance and was recognized as revenue in the period the applicable costs were
incurred.
(f) The Financial Accounting Standard Board's Statement No. 107, "Disclosures
About Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
that value. Statement No. 107 does not apply to all balance sheet items and
excludes certain financial instruments and all non-financial instruments such
as real estate and investment in joint ventures from its disclosure
requirements.
(g) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash is held or
invested in one financial institution.
<PAGE>
(h) 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.
(i) 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, the income allocations between the partners have
been adjusted for financial statement purposes in 1997.
(j) 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 per Limited Partnership
Interest.
4. Partnership Agreement:
The Partnership was organized on October 25, 1985. The Partnership Agreement
provides for Balcor Mortgage Advisors-VII to be the General Partner and for the
admission of Limited Partners through the sale of up to 1,600,000 Limited
Partnership Interests at $250 per Interest, 461,470 of which were sold on or
prior to January 31, 1987, the termination date of the offering.
Pursuant to the Partnership Agreement, the results of operations are allocated
90% to Limited Partners and 10% to the General Partner, of which 2.5% relates
to the Early Investment Incentive Fund. 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, the
income allocations between the partners have been adjusted for financial
statement purposes in 1997.
To the extent that Cash Flow was distributed, distributions were made as
follows: (i) 90% was distributed to the Limited Partners, (ii) 7.5% was
distributed to the General Partner, and (iii) an additional 2.5% was
distributed to the General Partner and constitutes the Early Investment
Incentive Fund (the "Fund"). Upon the liquidation of the Partnership, the
General Partner will return to the Partnership for distribution to Early
Investors an amount not to exceed the amount originally allocated to the Fund,
if necessary, for Early Investors to receive a return of their Original Capital
plus a specified Cumulative Return based on the date of investment.
Amounts placed in the Fund were available, at the sole discretion of the
General Partner and subject to certain limitations, to be used to repurchase
Interests from existing Limited Partners. All repurchases of Interests were
made at 90% of the then current valuation of such Limited Partnership Interests
at the previous quarter end less any distributions made after the previous
<PAGE>
quarter end. Distributions of Cash Flow and Mortgage Reductions pertaining to
such repurchased Interests were paid to the Fund and were available to
repurchase additional Interests. In February 1997, the Partnership
discontinued the repurchase of Interests from Limited Partners. As of December
31, 1997, there were 18,456 Interests and cash of $1,577,712 in the Early
Investment Incentive Fund.
5. Investment in Loan Receivable:
The Jonathan's Landing loan receivable was on non-accrual status prior to the
foreclosure of the property in 1995. Loans whose payment terms had been
restructured, are referred to as impaired loans. Interest income relating to
impaired loans would have been approximately $480,000 in 1995. Interest income
from impaired loans included in the accompanying Statements of Income and
Expenses amounted to approximately $480,000 ($567,000 cash basis) in 1995.
6. Allowances for Losses on Loans and Real Estate Held for Sale:
Activity recorded in the allowances for losses on loans and real estate held
for sale during the three years ended December 31, 1997 is described in the
table below.
1997 1996 1995
------------ ----------- -----------
Loans:
Balance at beginning of
year None None $ 1,166,260
Direct write-off of
loans against allowance None None (1,166,260)
------------ ----------- -----------
Balance at the end of
the year None None None
============ =========== ===========
Real Estate Held for Sale:
Balance at beginning of
year $ 3,935,000 $ 4,537,000 $ 4,537,000
Provision charged to
income None 3,935,000 None
Recovery of provision
previously charged
to income None (2,080,943) None
Direct write-off of
loans against allowance (3,935,000) (2,456,057) None
----------- ----------- -----------
Balance at the end of
the year None $ 3,935,000 $ 4,537,000
=========== =========== ===========
7. Interest Expense:
During 1996 and 1995, the Partnership incurred and paid interest expense on the
Sand Pebble Village Apartments - Phase II mortgage note payable of $202,127 and
$349,613, respectively.
<PAGE>
8. Management Agreements:
The Partnership's properties were under management agreements with third party
management companies prior to the sale of the properties. These management
agreements provided for annual fees of 5% of gross operating receipts for the
residential properties and 3% to 6% of gross operating receipts for the
commercial properties.
9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended
12/31/97 12/31/96 12/31/95
--------------- -------------- --------------
Paid Payable Paid Payable Paid Payable
------ ------- ------ ------- ------ -------
Mortgage servicing fees $17,172 None $41,703 $2,453 $17,013 None
Reimbursement of expenses
to the General Partner
at cost:
Accounting 31,468 $8,822 15,468 10,460 41,452 $4,120
Data processing 8,547 1,382 3,531 2,388 29,144 3,158
Investor communica-
tions None None None None 9,035 None
Legal 18,158 4,985 11,735 7,936 11,955 1,525
Portfolio management 96,912 26,531 80,149 54,197 129,125 17,813
Other 3,809 51 16,240 10,982 9,075 None
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 (the Balcor
Company) which received no fee for administering the program; however, the
General Partner was reimbursed for program expenses. The Partnership paid
premiums to the deductible insurance program of $23,141 and $66,840 for 1996
and 1995, respectively.
The General Partner made a contribution of $115,368 in connection with the
settlement of certain litigation as further discussed in Note 14 of Notes to
Financial Statements.
10. Property Sales:
(a) In April 1997, the Partnership sold the U.S. West Direct Center Office
Building in an all cash sale for $14,250,000. Pursuant to the terms of the
sale, $1,100,000 of the proceeds was placed in escrow. Of this amount,
$540,000 was returned to the Partnership in September 1997. The remaining
$560,000 of the sales proceeds continues to be held in escrow to be used for
the payment of costs relating to the removal of soil contamination at the
property and is recorded as a reduction in the sales price for financial
statement purposes. The General Partner believes that the Partnership will
have no further liability relating to environmental issues at the property.
<PAGE>
From the proceeds of the sale, the Partnership paid $324,819 in selling costs.
The basis of the property was $6,812,133. For financial statement purposes,
the Partnership recognized a gain of $6,553,048 from the sale of the property.
(b) In May 1997, the Partnership sold the Butler Plaza Shopping Center in an
all cash sale for $5,200,000. From the proceeds of the sale, the Partnership
paid $378,790 in selling costs. The basis of the property was $5,280,210, which
was net of a previously established allowance for potential losses of
$3,935,000, which was written off. The Partnership recognized a loss of
$459,000 from the sale of this property.
In 1996, the Partnership was awarded $300,300 in connection with the
condemnation of a portion of the land at the property. The Partnership as
well as tenants at the property are parties to the condemnation proceedings.
In 1997, the Partnership agreed to resolve the land condemnation for an
additional $367,850. The Partnership received $113,900 in 1996, which was
recorded as a reduction to the carrying value of the property. Of the
remaining $554,250, $189,400 is being held pending receipt of consents from
certain tenants at the property and is expected to be paid to the Partnership
during the second quarter of 1998. The remaining $364,850 is expected to be
paid to the Partnership upon the resolution of certain issues with the
tenants in the condemnation proceedings. Amounts will be recorded as income
when received.
(c) The loan collateralized by the Whispering Hills Apartments, which was
accounted for as real estate held for sale, was owned by a joint venture
consisting of the Partnership and an affiliate. The Partnership and the
affiliate held participating percentages in the joint venture of 75% and 25%,
respectively. In June 1997, the joint venture sold the loan in an all cash sale
for $17,200,000. From the proceeds of the sale, the joint venture paid $750,000
to the borrower in accordance with an amendment to the modified loan agreement
and $393,305 in selling costs. The basis of the property was $14,263,434. For
financial statement purposes, the Partnership recognized a gain of $1,793,261
from the sale of this property, of which $499,141 was the minority joint
venture partner's share.
(d) The Sand Pebble Village Apartments - Phase I was owned by a joint venture
consisting of the Partnership and an affiliate. The Partnership and the
affiliate held participating percentages in the joint venture of 55.37% and
44.63%, respectively. In August 1996, the joint venture sold the property in
an all cash sale for $19,411,765. From the proceeds of the sale, the joint
venture paid $431,822 in selling costs. The basis of the property was
$16,899,000, which was net of an allowance of $4,537,000. The Partnership had
previously established an allowance for potential losses related to the
property against which its remaining net investment of $2,456,057 was written
off. The Partnership recognized a recovery of the loss allowance of $2,080,943,
of which $928,725 was the minority joint venture partner's share. The
Partnership recognized no gain or loss on the sale of this property for
financial statement purposes.
(e) The Sand Pebble Village Apartments - Phase II was owned by a joint venture
consisting of the Partnership and an affiliate. The Partnership and the
affiliate held participating percentages in the joint venture of 55.37% and
44.63%, respectively. In August 1996, the joint venture sold the property in an
all cash sale for $12,088,235. From the proceeds of the sale, the joint venture
paid $4,859,155 to the third party mortgage holder in full satisfaction of the
first mortgage loan and $272,701 in selling costs. The basis of the property
<PAGE>
was $9,357,449. For financial statement purposes, the Partnership recognized a
gain of $2,458,085 from the sale of this property, of which $1,097,043 was the
minority joint venture partner's share.
(f) In September 1996, the Partnership sold the Hickory Creek Apartments in an
all cash sale for $14,300,000. From the proceeds of the sale, the Partnership
paid $349,622 in selling costs. The basis of the property was $10,453,558. For
financial statement purposes, the Partnership recognized a gain of $3,496,820
from the sale of this property.
(g) The Jonathan's Landing Apartments was owned by a joint venture consisting
of the Partnership and an affiliate. The Partnership and the affiliate held
participating percentages in the joint venture of 53.50% and 46.50%,
respectively. In November 1996, the joint venture sold the property in an all
cash sale for $21,300,000. From the proceeds of the sale, the joint venture
paid $796,475 in selling costs. The basis of the property was $18,354,120. For
financial statement purposes, the Partnership recognized a gain of $2,149,405
from the sale of this property, of which $999,473 was the minority joint
venture partner's share.
11. Affiliates' Participation in Joint Ventures:
(a) The Partnership classified the first mortgage loan investment
collateralized by the Whispering Hills Apartments as real estate held for sale.
This investment was owned by a joint venture consisting of the Partnership and
an affiliate. Profits and losses were allocated 75% to the Partnership and 25%
to the affiliate. The joint venture sold this property during 1997. See Note
10 of Notes to Financial Statements for additional information.
(b) The Sand Pebble Village - Phases I and II apartment complexes were owned by
a joint venture consisting of the Partnership and an affiliate. Profits and
losses were allocated 55.37% to the Partnership and 44.63% to the affiliate.
The joint venture sold these properties during 1996. See Note 10 of Notes to
Financial Statements for additional information.
(c) The Jonathan's Landing Apartments was owned by a joint venture consisting
of the Partnership and an affiliate. Profits and losses were allocated 53.5% to
the Partnership and 46.5% to the affiliate. The joint venture sold this
property during 1996. See Note 10 of Notes to Financial Statements for
additional information.
All assets, liabilities, income and expenses of the joint ventures are included
in the financial statements of the Partnership with the appropriate adjustment
of profit or loss for each affiliate's participation.
Distributions of $4,243,964, $22,619,077 and $1,238,784 were made to the joint
venture partners during 1997, 1996 and 1995, respectively. During 1997, the
minority joint venture partner of the Whispering Hills Apartments was allocated
its share of the gain on the sale of the property of $499,141. During 1996,
the minority joint venture partner of the Sand Pebble Village - Phase II and
Jonathan's Landing apartment complexes was allocated its share of the gains on
the sales of these properties of $1,097,043 and $999,473, respectively. In
addition, during 1996, the minority joint venture partner of the Sand Pebble
Village - Phase I Apartments was allocated its share of a recovery of a
previously established loss allowance of $928,725.
<PAGE>
12. Settlement of Litigation:
A settlement received final approval by the court in November 1996 in the class
action, Paul Williams and Beverly Kennedy et al. v. Balcor Pension Investors,
et. al. upon the terms described in the notice to class members in September
1996. The General Partner made a contribution of $115,368 to the Partnership,
of which the plaintiff's counsel received $11,537 pursuant to the settlement
agreement. In February 1997, the General Partner paid the remainder of the
settlement of $103,831 ($0.22 per Interest) to members of the class. Of the
settlement amount, $72,839 was paid to original investors who held their
Limited Partnership Interests at the date of the settlement and was recorded as
a distribution to Limited Partners in the Financial Statements. The remaining
portion of the settlement of $30,992 was paid to original investors who
previously sold their Interests in the Partnership. This amount was recorded as
an administrative expense in the Financial Statements. Similar contributions
and payments were made on the seven other partnerships included in the lawsuit
in addition to those payments described above. The Balcor Company paid an
additional $635,000 to the plaintiffs' class counsel and The Balcor Company
received approximately $946,000 from the eight partnerships as a reimbursement
of its legal expenses, of which $90,979 was the Partnership's share. The
settlement had no material impact on the Partnership.
13. Fair Value of Financial Instruments:
As of December 31, 1997 and 1996, the carrying amounts of cash and cash
equivalents, accounts and accrued interest receivable, and accounts payable
approximate fair value.
14. Contingency:
The Partnership is currently involved in a lawsuit whereby the Partnership, the
General Partner and certain third parties have been named as defendants seeking
damages relating to tender offers to purchase interests in the Partnership and
nine affiliated partnerships initiated by the third party defendants in 1996.
The defendants continue to vigorously contest this action. The action has been
dismissed with prejudice and plaintiffs have filed an appeal. It is not
determinable at this time whether or not an unfavorable decision in this action
would have a material adverse impact on the financial position, operations and
liquidity of the Partnership. The Partnership believes that it has meritorious
defenses to contest the claims.
15. Extraordinary Item:
In connection with the sale of Sand Pebble Village Apartments - Phase II in
August 1996, the joint venture paid a prepayment penalty in the amount of
$145,775 which was recognized as debt extinguishment expense and classified as
an extraordinary item. The minority joint venture partner's share of the
extraordinary item is $65,074.
<PAGE>
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<PERIOD-END> DEC-31-1997
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