Item 1. Business - ----------------
Balcor Pension Investors-II (the "Registrant") is a limited partnership formed in 1981 under the laws of the State of Illinois. The Registrant raised $85,010,000 from sales of Limited Partnership Interests. The Registrant's operations consisted of investing in wrap-around mortgage loans and, to a lesser extent, investing in other junior mortgage loans and first mortgage loans. The Registrant also operated properties acquired through foreclosure. All information included in this report relates to this industry segment.
The Registrant originally funded thirty-three loans. A portion of the Mortgage Reductions generated by repayments of its loans was reinvested in three additional loans, a portion was added to the Registrant's working capital reserves, and the remainder was distributed to the Limited Partners. As a result of the repayments, foreclosures, and write-offs of thirty-five loans, and the sale of the remaining loan in 1996, the Registrant has no loans in its portfolio at December 31, 1996. Thirteen properties were acquired through foreclosure and the Registrant has disposed of all of its properties, including five properties in 1996. As of December 31, 1996, the Registrant has no properties remaining in its portfolio.
The Registrant sold its remaining property, Parkway Distribution Center, in December 1996. A majority of the proceeds were distributed to Limited Partners in January 1997. The Registrant has retained a portion of the cash to satisfy obligations of the Registrant as well as establish a reserve for contingencies. The timing of the termination of the Registrant and final distribution of cash will depend upon the nature and extent of liabilities and contingencies which exist or may arise. Such contingencies may include legal and other fees stemming from litigation involving the Registrant including, but not limited to, the lawsuit discussed in "Item 3. Legal Proceedings." In the absence of any contingency, the reserves will be paid within twelve months of the last property being sold. In the event a contingency exists, reserves may be held by the Registrant for a longer period of time.
During June, October and December 1996, the Registrant sold the Cumberland Pines, Sherwood Acres - Phases I and II and Hollowbrook apartment complexes in all cash sales for $9,200,000, $18,725,000 and $3,000,000, respectively. During December 1996, the Registrant sold the Parkway Distribution Center in an all cash sale for $6,050,000. See "Other Information" and "Item 7. Liquidity and Capital Resources" for additional information.
During August 1996, the Registrant sold its interest in the Alzina Office Building loan for $9,153,755. See Item 7. "Liquidity and Capital Resources" for additional information.
The officers and employees of Balcor Mortgage Advisors, the General Partner of the Registrant, and its affiliates perform services for the Registrant. The Registrant currently has no employees engaged in its operations.
Other Information - ------------------
Hollowbrook Apartments - -----------------------
As previously reported, on September 17, 1996, the Registrant contracted to sell Hollowbrook Apartments, Orlando, Florida, to an unaffiliated party, Housing Systems, Incorporated, a Georgia corporation, for a sale price of $3,000,000. The purchaser assigned its rights under the agreement of sale to one of its affiliates, H & G Partnership Limited Partnership, a Georgia limited partnership, and the sale closed on December 9, 1996. From the proceeds of the sale, the Registrant paid $120,000 to an unaffiliated party as a brokerage commission, $37,500 to an affiliate of the third party providing property management services for the property as a fee for services rendered in connection with the sale of the property and $35,095 in closing costs. The Registrant received the remaining proceeds of approximately $2,807,000.
Parkway Commerce Center - -----------------------
As previously reported, on August 13, 1996, the Registrant contracted to sell Parkway Commerce Center, Fort Lauderdale, Florida, to an unaffiliated party, Parkway Commerce Center, Ltd., a Florida limited partnership. The sale closed on December 16, 1996. The sale price was $6,050,000. From the proceeds of the sale, the Registrant repaid the outstanding balance of the first mortgage loans of $653,040 and paid a total of $178,500 to two unaffiliated parties as a brokerage commission, a prepayment penalty of $20,389 and $47,250 in closing costs. The purchaser received a $87,981 credit against the sale price relating to certain unleased tenant space at the property. The Registrant received the remaining proceeds of approximately $5,063,000.
Item 2.

Item 2. Properties - ------------------
The Registrant no longer owns any physical properties.
Item 3.

Item 3. Legal Proceedings - --------------------------
Williams class action - ---------------------
In February 1990, a proposed class-action complaint was filed, Paul Williams and Beverly Kennedy, et al. vs. Balcor Pension Investors, et al., Case No.: 90-C-0726, U.S. District Court, Northern District of Illinois). The Registrant, the General Partner, seven affiliated limited partnerships (together with the Registrant, the "Related Partnerships") and other affiliates were the defendants. The complaint alleged violations of Federal securities laws as to the adequacy and accuracy of disclosure of information in the offering of limited partnership interests in the Related Partnerships and alleged breach of fiduciary duty, fraud, negligence and violations under the Racketeer Influenced and Corrupt Organizations Act. The complaint sought compensatory and punitive damages.
A settlement of these proceedings was approved by the District Court on November 20, 1996 on the terms previously described in the form of settlement agreement attached as Exhibit 99 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996. Distributions to be paid pursuant to the settlement were paid in February 1997. All proceedings relating to this matter are now dismissed.
Proposed Class and Derivative Action Lawsuits - ----------------------------------------------
On June 14, 1996, a proposed class and derivative action complaint was filed, Dee vs. Walton Street Capital Acquisition II, LLC (Circuit Court of Cook County, Illinois, County Department, Chancery Division ("Chancery Court"), Case No. 96 CH 06283) (the "Dee Case"), naming the General Partner and the general partners (the "Balcor Defendants") of nine other limited partnerships sponsored by The Balcor Company (together with the Registrant, the "Affiliated Partnerships"), as well as the Affiliated Partnerships, as defendants. Additional defendants were Insignia Management Group ("Insignia") and Walton Street Capital Acquisition II, LLC ("Walton") and certain of their affiliates and principals (collectively, the "Walton and Insignia Defendants"). The complaint alleged, among other things, that the tender offers for the purchase of limited partnership interests in the Affiliated Partnerships made by a joint venture consisting of affiliates of Insignia and Walton were coercive and unfair.
On July 1, 1996, another proposed class action complaint was filed in the Chancery Court, Anderson vs. Balcor Mortgage Advisors (Case No. 96 CH 06884) (the "Anderson Case"). An amended complaint consolidating the Dee and Anderson Cases (the "Dee/Anderson Case") was filed on July 25, 1996.
The complaint seeks to assert class and derivative claims again the Walton and Insignia Defendants and alleges that, in connection with the tender offers, the Walton and Insignia Defendants misused the Balcor Defendants' and Insignia's fiduciary positions and knowledge in breach of the Walton and Insignia Defendants' fiduciary duty and in violation of the Illinois Securities and Consumer Fraud Acts. The plaintiffs amended their complaint on October 8, 1996, adding additional claims. The plaintiffs requested certification as a class and derivative action, unspecified compensatory damages and rescission of the tender offers. Each of the defendants filed motions to dismiss the complaint. On January 7, 1997, the Chancery Court denied the plaintiffs' motion for leave to amend the complaint and dismissed the matter with prejudice.
On February 3, 1997, the plaintiffs filed a Notice of Appeal of the Chancery Court's order to the Appellate Court of Illinois.
The Balcor Defendants intend to vigorously contest this action. No class has been certified as of this date. The Registrant believes it has meritorious defenses to contest the claims. It is not determinable at this time whether or not an unfavorable decision in this action would have a material adverse impact on the Registrant.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders - -----------------------------------------------------------
No matters were submitted to a vote of the Limited Partners of the Registrant during 1996.
PART II
Item 5.

Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------------------------------------------------------------------------- Matters - -------
There has not been an established public market for Limited Partnership Interests and one will not develop. For information regarding previous distributions, see "Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources", below.
As of December 31, 1996, the number of record holders of Limited Partnership Interests of the Registrant was 5,256.
Item 6.

Item 7. Management's Discussion and Analysis of Financial Condition and - ----------------------------------------------------------------------- Results of Operations - ---------------------
Operations - ----------
Summary of Operations - ---------------------
During 1996, Balcor Pension Investors-II (the "Partnership") sold all of its remaining investments, including five properties and one loan receivable. As a result, the Partnership recognized significant gains, which was the primary reason for the increase in net income during 1996 as compared to 1995. In addition, the Partnership recognized a recovery of the previously established loss allowance related to the Alzina Office Building loan which contributed to the increase in net income during 1996. During 1995, operations continued to improve at all of the properties owned by the Partnership resulting in an increase in net income during 1995 as compared to 1994. Further discussion of the Partnership's operations is summarized below.
1996 Compared to 1995 - ---------------------
The repayment of the Stonegate Austin Mobile Home Park wrap-around loan in March 1995 and the sale of the Partnership's interest in the Alzina Office Building wrap-around loan in August 1996 resulted in a decrease in net interest income on loans receivable during 1996 as compared to 1995.
The sale of the Partnership's interest in the Alzina Office Building loan, and the related payoff of the underlying mortgage, resulted in a decrease in interest expense on loans payable during 1996 as compared to 1995.
Operations of real estate held for sale represent the net operations of those properties acquired by the Partnership through foreclosure. At December 31, 1996, the Partnership did not operate any properties. The Partnership sold the Cumberland Pines, Sherwood Acres - Phases I and II and Hollowbrook apartment complexes in June, October and December 1996, respectively. In addition, the Partnership sold the Parkway Distribution Center in December 1996. Original funds advanced by the Partnership totaled approximately $13,339,000 for these real estate investments. The property sales resulted in a decrease in income from operations of real estate held for sale during 1996 as compared to 1995. Contributing to the decrease in income from operations during 1996 was increased repair and maintenance expense at the Hollowbrook Apartments for roof repairs and at the Sherwood Acres - Phases I and II Apartments for replacement of floor coverings and the completion of structural, asphalt and pool repairs. These expenditures were incurred to prepare the properties for sale in 1996.
The Alzina Office Building loan bore interest at a contractually-fixed interest rate. The loan also provided for participation by the Partnership in increases in value of the collateral property when the loan was repaid or refinanced. In addition, the loan agreement allowed the Partnership to receive a percentage of rental income exceeding a base amount. This participation income was reflected in the accompanying Statements of Income and Expenses when received. The Partnership received participation income on the Alzina Office Building loan during 1995 and prior to its sale in August 1996.
Provisions are charged to income when the General Partner believes an impairment has occurred to the value of its properties or in a borrower's ability to repay a loan or in the value of the collateral property. Determinations of fair value are made periodically on the basis of performance under the terms of the loan agreement and assessments of property operations. Determinations of fair value represent estimations based on many variables which affect the value of real estate, including economic and demographic conditions. During 1996, the Partnership recognized a recovery of $3,302,517 related to its loan, and recognized a provision of $284,573, a recovery of $100,000 and a write off of a previously established allowance of $684,573 related to the Partnership's real estate held for sale. During 1995, the Partnership recognized a provision of $700,000 related to its loans and a recovery of $700,000 related to its real estate held for sale. The provisions were recognized to provide for changes in the estimate of the fair value of certain properties in the Partnership's portfolio.
The Partnership incurred higher legal, consulting, printing and postage costs in connection with its response to a tender offer during the second quarter of 1996. As a result, administrative expenses increased during 1996 as compared to 1995.
During 1996, the Partnership recognized a gain for financial statement purposes of $306,759 in connection with the sale of its interest in the Alzina Office Building loan, exclusive of the recovery of a previously established loss allowance related to this loan of $3,302,517.
During 1996, the Partnership sold the Cumberland Pines and Sherwood Acres Phases I and II apartment complexes and the Parkway Distribution Center. As a result, the Partnership recognized gains in connection with these sales totaling $8,227,212 for financial statement purposes.
In connection with the 1996 sale of the Sherwood Acres-Phases I and II apartment complexes, the Partnership paid prepayment penalties of $453,928 and wrote off the remaining unamortized deferred financing fees related to the properties of $99,229. In addition, the Partnership paid a prepayment penalty in connection with the 1996 sale of the Parkway Distribution Center of $20,389. These amounts were recognized as extraordinary items in 1996 and classified as debt extinguishment expenses of $573,546 for financial statement purposes.
1995 Compared to 1994 - ---------------------
The repayments of the Tudor Heights Apartments first mortgage loan and the North Arch Village Apartments wrap-around loan in January and March 1994, respectively, resulted in a decrease in interest income on loans receivable during 1995 as compared to 1994. This decrease was partially offset by additional interest income of approximately $219,000 received in conjunction with the repayment of the Stonegate Austin Mobile Home Park wrap-around loan in March 1995.
The North Arch Village and Stonegate Austin loan repayments resulted in a decrease in interest expense on loans payable during 1995 as compared to 1994.
At December 31, 1995, the Partnership was operating five properties. Higher rental income due to higher average occupancy levels and rental rates at all of the properties, as well as lower repair and maintenance expenditures at the Hollowbrook and Sherwood Acres - Phases I and II apartment complexes, were the primary reasons for the increase in income from operations of real estate held for sale during 1995 as compared to 1994. In addition, refunds relating to prior years' taxes were received during 1995 from the local taxing authorities at the Parkway Distribution Center and the Hollowbrook Apartments. These refunds, combined with lower real estate taxes during 1995 at the Parkway Distribution Center and the Hollowbrook Apartments and the cessation of interest expense on the Cumberland Pines Apartment's mortgage note upon repayment of the loan in 1994, also contributed to the increase.
A special distribution to Limited Partners was made in April 1995 from the proceeds received in connection with the Tudor Heights and North Arch Village mortgage loan repayments. Prior to this distribution, these proceeds were invested in short-term investments. As a result interest income on short-term investments decreased during 1995 as compared to 1994.
The Partnership received participation income on the Alzina Office Building loan during 1995 and 1994.
The Partnership received a prepayment premium of $291,000 in January 1994 in connection with the Tudor Heights loan repayment.
The Partnership recognized a provision of $700,000 and a recovery of $1,200,000 in 1995 and 1994, respectively, related to its loans. In addition, during 1995 and 1994, respectively, the Partnership recognized a recovery of $700,000 and a provision of $1,200,000 related to the Partnership's real estate held for sale to provide for changes in the estimate of the fair value of certain properties in the Partnership's portfolio.
Legal fees incurred in 1994 relating to the Interstate Office Building litigation resulted in a decrease in administrative expenses during 1995 as compared to 1994.
Liquidity and Capital Resources - -------------------------------
The cash position of the Partnership increased by approximately $13,951,000 as of December 31, 1996 when compared to December 31, 1995 primarily due to net proceeds received from the sales of five properties and from the sale of the Partnership's interest in the Alzina Office Building loan. The Partnership generated cash flow totaling approximately $1,336,000 from its operating activities primarily as a result of the net interest income earned on its investment in loan receivable, the operations of its properties, and the interest received on its short-term investments, net of the payment of administrative expenses. The Partnership also generated cash flow from its investing activities of approximately $44,375,000 primarily due to the receipt of proceeds, less selling costs, totaling approximately $35,888,000 from the sales of the properties and $8,814,000 from the sale of the Partnership's interest in the Alzina Office Building loan. The Partnership's financing activities primarily consisted of the payment of distributions totaling approximately $17,233,000 to the Partners, repurchases of Limited Partnership Interests totaling approximately $290,000, principal payments on the underlying loan and mortgage notes payable totaling approximately $575,000, as well as the repayment of mortgage notes payable of approximately $12,001,000 in connection
with the property sales. The Partnership also made a special distribution to Limited Partners from Cash Flow and Mortgage Reductions in January 1997 as described below.
The Partnership defines cash flow generated from its properties as an amount equal to the properties' revenue receipts less property related expenditures, which include debt service payments. During 1995 and prior to being sold in 1996, all five of the Partnership's properties generated positive cash flow.
The Partnership sold its remaining property, Parkway Distribution Center, in December 1996. A majority of the proceeds were distributed to Limited Partners in January 1997. The Partnership has retained a portion of the cash to satisfy obligations of the Partnership as well as establish a reserve for contingencies. The timing of the termination of the Partnership and final distribution of cash will depend upon the nature and extent of liabilities and contingencies which exist or may arise. Such contingencies may include legal and other fees stemming from litigation involving the Partnership including, but not limited to, the lawsuit discussed in "Item 3. Legal Proceedings." In the absence of any contingency, the reserves will be paid within twelve months of the last property being sold. In the event a contingency exists, reserves may be held by the Partnership for a longer period of time.
In June 1996, the Partnership sold the Cumberland Pines Apartments in an all cash sale for $9,200,000. From the proceeds of the sale, the Partnership paid $153,200 in selling costs. The remainder of the proceeds were distributed to the Partners in July 1996. See Note 7 of Notes to Financial Statements for additional information.
In October 1996, the Partnership sold the Sherwood Acres - Phases I and II apartment complexes in an all cash sale for $18,725,000. From the proceeds of the sale, the Partnership paid $11,348,198 to the third party mortgage holder in full satisfaction of the first mortgage loans, paid $427,281 in selling costs, and paid $453,928 of prepayment penalties. Pursuant to the terms of the sale, the Partnership retained $250,000 of the proceeds until February 1997, which has since been released and will be distributed to the Partners in 1997. A majority of the remaining proceeds were distributed to the Partners in January 1997. See Note 7 of Notes to Financial Statements for additional information.
In August 1996, the Partnership sold its interest in the Alzina Office Building loan for $9,153,755. The purchaser acquired the Alzina Office Building loan receivable subject to the existing underlying mortgage loan in the amount of $2,816,504. From the proceeds of the sale, the Partnership paid $339,500 in selling costs. A majority of the remaining proceeds were distributed to the Partners in October 1996. See Note 6 of the Notes to the Financial Statements for additional information.
In December 1996, the Partnership sold the Hollowbrook Apartments in an all cash sale for $3,000,000. From the proceeds of the sale, the Partnership paid $192,595 in selling costs. Pursuant to the terms of the sale, $50,000 of the proceeds will be retained by the Partnership until March 1997. A majority of the remaining proceeds were distributed to the Partners in January 1997. See Note 7 of Notes to Financial Statements for additional information.
In December 1996, the Partnership sold the Parkway Distribution Center in an all cash sale for $6,050,000. The purchaser was given a credit of $87,981 relating to certain tenant vacancies, resulting in a net sale price of $5,962,019. From the proceeds of the sale, the Partnership paid $653,040 to the third party mortgage holder in full satisfaction of the first mortgage loans, paid $225,750 in selling costs, and paid a prepayment penalty of $20,389. A majority of the remaining proceeds were distributed to the Partners in January 1997. See Note 7 of Notes to Financial Statements for additional information.
The Partnership made four distributions totaling $213.00, $103.18 and $82.50 per Interest in 1996, 1995 and 1994, respectively. See Statement of Partners' Capital for additional information. Distributions were comprised of $101.00 of Cash Flow and $112.00 of Mortgage Reductions in 1996, $62.00 of Cash Flow and $41.18 of Mortgage Reductions in 1995 and $20.00 of Cash Flow and $62.50 of Mortgage Reductions in 1994. The distributions of Mortgage Reductions in 1996, 1995 and 1994 resulted from loan repayments, and property and loan sales. Cash Flow distributions increased between 1996 and 1995 due to the payment of special distributions of $48.00 and $29.00 per Interest from Cash Flow reserves in July and October 1996, respectively. Cash Flow distributions also increased between 1995 and 1994 due to the payment of a special distribution of $42.00 per Interest from Cash Flow reserves in July 1995.
In January 1997, the Partnership paid $10,243,713 ($120.50 per Interest) to the holders of Limited Partnership Interests representing the quarterly distribution of Cash Flow of $5.50 per Interest for the fourth quarter of 1996 and a special distribution of $115.00 per Interest from proceeds received in connection with the sale of the Sherwood Acres - Phases I and II and Hollowbrook apartment complexes and the Parkway Distribution Center. The level of the regular quarterly distribution decreased from the amount distributed to Limited Partners during the third quarter of 1996 primarily due to decreased Cash Flow resulting from the loan repayment and property sales in 1996. Including the January 1997 distribution, Limited Partners have received distributions totaling $1,690.18 per $1,000 Interest. Of this amount $1,052.00 represents Cash Flow from operations and $638.18 represents a return of Original Capital. In January 1997, the Partnership also paid $38,963 to the General Partner as its distributive share of Cash Flow distributed for the fourth quarter of 1996 and made a contribution to the Early Investment Incentive Fund in the amount of $12,988. The Partnership will distribute any remaining available proceeds and Cash Flow reserves for distribution in April 1997. In February 1997, the General Partner made a settlement payment of $35,067 ($.47 per $1,000 Interest) to members of the class pursuant to the settlement approved by the court in November 1996 in the Paul Williams and Beverly Kennedy et. al. v. Balcor Pension Investors, et. al. class action lawsuit.
During 1996, the General Partner on behalf of the Partnership used amounts placed in the Early Investment Incentive Fund to repurchase 826 Interests from Limited Partners at a total cost of $289,903. In February 1997, the Partnership discontinued the repurchase of Interests from Limited Partners.
Item 8.

Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
See Index to Financial Statements in this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K is not applicable.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure - --------------------
On September 14, 1995 the Registrant approved the engagement of Coopers & Lybrand L.L.P. as its independent auditors for the fiscal year ending December 31, 1995 to replace the firm of Ernst & Young L.L.P., who were dismissed as auditors of the Registrant effective September 14, 1995. The General Partner of the Registrant approved the change in auditors.
The reports of Ernst & Young L.L.P. on the Registrant's financial statements for each of the two fiscal years ended December 31, 1994 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audit of the Registrant's financial statements for each of the two fiscal years ended December 31, 1994, and in the subsequent interim period, there were no disagreements with Ernst & Young L.L.P. on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Ernst & Young L.L.P. would have caused Ernst & Young L.L.P. to make reference to the matter in their report.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant - -----------------------------------------------------------
(a) Neither the Registrant nor Balcor Mortgage Advisors, its General Partner, has a Board of Directors.
(b, c & e) The names, ages and business experience of the executive officers and significant employees of the General Partner of the Registrant are as follows:
TITLE OFFICERS ----- -------- Chairman, President and Chief Thomas E. Meador Executive Officer Senior Vice President Alexander J. Darragh Senior Vice President James E. Mendelson Senior Vice President John K. Powell, Jr. Managing Director, Chief Jayne A. Kosik Financial Officer, Treasurer and Assistant Secretary
Thomas E. Meador (age 49) joined Balcor in July 1979. He is Chairman, President and Chief Executive Officer and has responsibility for all ongoing day-to-day activities at Balcor. He is a Director of The Balcor Company. He is also Senior Vice President of American Express Company and is responsible for its real estate operations worldwide. Prior to joining Balcor, Mr. Meador was employed at the Harris Trust and Savings Bank in the commercial real estate division where he was involved in various lending activities. Mr. Meador received his M.B.A. degree from the Indiana University Graduate School of Business.
Alexander J. Darragh (age 42) joined Balcor in September 1988 and is responsible for due diligence analysis and real estate advisory services for Balcor and American Express Company. He also has supervisory responsibility for Balcor's environmental matters. Mr. Darragh received masters' degrees in Urban Geography from Queen's University and in Urban Planning from Northwestern University.
James E. Mendelson (age 34) joined Balcor in July 1984 and is responsible for Balcor's property sales activities. He also has supervisory responsibility for Balcor's accounting, financial, treasury, investor services and investment administration functions. From 1989 to 1995, Mr. Mendelson was Vice President - Transaction Management and Vice President - Senior Transaction Manager and had responsibility for various asset management matters relating to real estate investments made by Balcor, including negotiations for the restructuring of mortgage loan investments. Mr. Mendelson received his M.B.A. degree from the University of Chicago.
John K. Powell, Jr. (age 46) joined Balcor in September 1985 and is responsible for portfolio and asset management matters relating to Balcor's partnerships. Mr. Powell also has supervisory responsibility for Balcor's risk management function. He received a Master of Planning degree from the University of Virginia. Mr. Powell has been designated a Certified Real Estate Financier by the National Society for Real Estate Finance and is a full member of the Urban Land Institute.
Jayne A. Kosik (age 39) joined Balcor in August 1982 and, as Chief Financial Officer, is responsible for Balcor's financial, human resources and treasury functions. From June 1989 until October 1996, Ms. Kosik had supervisory responsibility for accounting functions relating to Balcor's public and private partnerships. She is also Treasurer and a Managing Director of The Balcor Company. Ms. Kosik is a Certified Public Accountant.
(d) There is no family relationship between any of the foregoing officers.
(f) None of the foregoing officers or employees are currently involved in any material legal proceedings nor were any such proceedings terminated during the fourth quarter of 1996.
Item 11.

Item 11. Executive Compensation - -------------------------------
The Registrant paid $2,289 in 1996 with respect to one of the executive officers and directors of Balcor Mortgage Advisors, the General Partner. Certain of the remaining officers receive compensation from The Balcor Company (but not from the Registrant) for services performed for various affiliated entities, which may include services performed for the Registrant. The Registrant has not paid and does not intend to pay any remuneration to the remaining executive officers and directors of the General Partner. However, the General Partner believes that any such compensation attributable to services performed for the Registrant is immaterial to the Registrant. See Note 9 of Notes to Financial Statements for the information relating to transactions with affiliates.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management - -----------------------------------------------------------------------
(a) No person owns of record or is known by the Registrant to own beneficially more than 5% of the outstanding Limited Partnership Interests of the Registrant.
(b) Balcor Mortgage Advisors and its officers and partners own as a group the following Limited Partnership Interests of the Registrant:
Amount Beneficially Title of Class Owned Percent of Class -------------- ------------- ----------------
Limited Partnership 52 Interests Less than 1% Interests
Relatives and affiliates of the officers and partners of the General Partner own one Limited Partnership Interest.
(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.

Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------
(a, b) See Note 3 of Notes to Financial Statements for information relating to the Partnership Agreement and the allocation of distributions and profits and losses.
See Note 9 of Notes to Financial Statements for additional information relating to transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------
(a) (1 & 2) See Index to Financial Statements in this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement of Limited Partnership and Amended and Restated Certificate of Limited Partnership, previously filed as Exhibits 3(a) and 3(b) to Amendment No. 1 to the Registrant's Registration Statement on Form S-11 dated May 7, 1981 (Registration No. 2-70841), are incorporated herein by reference.
(4) Form of Subscription Agreement previously filed as Exhibit 4(a) to Amendment No. 1 to the Registrant's Registration Statement on Form S-11 dated May 7, 1981 (Registration No. 2-70841) and Form of Confirmation regarding Interests in the Registrant set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1992 (Commission File No. 0-10225) are incorporated herein by reference.
(10) (i)(a) Agreement of Sale and attachment thereto relating to the sale of Cumberland Pines Apartments, Atlanta, Georgia, previously filed as Exhibit (10) to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1996, is incorporated herein by reference.
(b) First, Second and Third Amendments to Agreement of Sale and Escrow Trust Instructions relating to the sale of Cumberland Pines Apartments, Atlanta, Georgia, previously filed as Exhibits (99)(a)(b) and (c) to the Registrant's Report on Form 8-K dated June 28, 1996, is incorporated herein by reference.
(ii) Purchase and Sale Agreement regarding the sale of the Partnership's interest in the Alzina Office Building loan, previously filed as Exhibit (10) (iii) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996, is incorporated herein by reference.
(iii)(a)Agreement of Sale and attachment thereto and Amendment to Agreement of Sale and Escrow Agreement relating to the sale of Parkway Commerce Center, Fort Lauderdale, Florida, previously filed as Exhibits 2(a) and 2(b) to the Registrant's Current Report on Form 8-K dated August 13, 1996, are incorporated herein by reference.
(b) Second Amendment to Agreement of Sale and Escrow Agreement relating to the sale of Parkway Commerce Center, Fort Lauderdale, Florida, previously filed as Exhibit (99) to the Registrant's Report on Form 8-K dated September 17, 1996, is incorporated herein by reference.
(iv)(a) Agreement of Sale and attachment thereto and First Amendment to Agreement of Sale relating to the sale of Hollowbrook Apartments, Orlando, Florida, previously filed as Exhibits 2(a) and 2(b) to the Registrant's Current Report on Form 8-K dated September 17, 1996, are incorporated herein by reference.
(b) Letter Agreement relating to the sale of Hollowbrook Apartments, Orlando, Florida, previously filed as Exhibit (99) to the Registrant's Current Report on Form 8-K dated October 14, 1996, is incorporated herein by reference.
(v)(a) Agreement of Sale and attachment thereto relating to the sale of Sherwood Acres Apartments, Phases I and II, Baton Rouge, Louisiana, previously filed as Exhibit (2) to the Registrant's Current Report on Form 8-K dated October 14, 1996, is incorporated herein by reference.
(b) First Amendment to Agreement of Sale relating to the sale of Sherwood Acres Apartments, Phases I and II, Baton Rouge, Louisiana, previously filed as Exhibit (10)(v)(b) to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996, is incorporated herein by reference.
(c) Second Amendment to Agreement of Sale relating to the sale of Sherwood Acres Apartments, Phases I and II, Baton Rouge, Louisiana, previously filed as Exhibit (10)(v)(c) to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1996, is incorporated herein by reference.
(16) Letter from Ernst & Young LLP dated September 19, 1995 regarding the change in the Registrant's certifying accountant previously filed as Exhibit 16 to the Registrant's Report on Form 8-K/A dated October 27, 1995 (Commission File No. 0-10225) is hereby incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for 1996 is attached hereto.
(99) Form of Notice of Proposed Class Action Settlement and Hearing relating to Paul Williams and Beverly Kennedy, et al. vs. Balcor Pension Investors, et al. previously filed as Exhibit (99) to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1996 is incorporated herein by reference.
(b) Reports on Form 8-K:
(i) A Current Report on Form 8-K dated September 17, 1996 was filed reporting the contract to sell Hollowbrook Apartments (formerly known as Curry Ford Apartments), Orlando, Florida; the amendment to the contract to sell Parkway Commerce Center, Fort Lauderdale, Florida; and the closing of the sale of the Registrant's interest in the Alzina Office Building loan, is incorporated herein by reference.
(ii) A Current Report on Form 8-K dated October 14, 1996 was filed reporting the contract to sell Sherwood Acres Apartments, Phases I and II, Baton Rouge, Louisiana, and a letter agreement relating to the Hollowbrook Apartments, Orlando, Florida, is incorporated herein by reference.
(c) Exhibits: See Item 14(a)(3) above.
(d) Financial Statement Schedules: None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
BALCOR PENSION INVESTORS-II
By: /s/Jayne A. Kosik ------------------------ Jayne A. Kosik Managing Director and Chief Financial Officer (Principal Accounting Officer) of Balcor Mortgage Advisors, the General Partner
Date: March 26, 1997 --------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - ------------------------------------------------------- ------------
President and Chief Executive Officer (Principal Executive Officer) of Balcor Mortgage /s/Thomas E. Meador Advisors, the General Partner March 26, 1997 - -------------------- -------------- Thomas E. Meador Managing Director and Chief Financial Officer (Principal Accounting Officer) of Balcor Mortgage Advisors, the /s/Jayne A. Kosik General Partner March 26, 1997 - -------------------- --------------- Jayne A. Kosik
Report of Independent Accountants
Report of Independent Auditors
Financial Statements
Balance Sheets, December 31, 1996 and 1995
Statements of Partners' Capital, for the years ended December 31, 1996, 1995 and 1994
Statements of Income and Expenses, for the years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows, for the years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
Financial Statement Schedules are omitted for the reason that they are inapplicable or equivalent information has been included elsewhere herein.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Balcor Pension Investors-II:
We have audited the accompanying balance sheets of Balcor Pension Investors-II (An Illinois Limited Partnership) as of December 31, 1996 and 1995 and the related statements of partners' capital, income and expenses, and cash flows for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Balcor Pension Investors-II at December 31, 1996 and 1995, and the results of its operations and its cash flows for the each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
As described in Note 1 to the financial statements, the Partnership Agreement provides for the dissolution of the Partnership upon the disposition of all it interests in real estate. At December 31, 1996, the Partnership has disposed of all its real estate interests. Upon resolution of the litigation described in Note 10 to the financial statements, the Partnership intends to cease operations and dissolve.
/s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois March 26, 1997
REPORT OF INDEPENDENT AUDITORS
To the Partners of Balcor Pension Investors-II:
We have audited the accompanying statements of partners' capital, income and expenses and cash flows of Balcor Pension Investors-II (An Illinois Limited Partnership) for the year ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Balcor Pension Investors-II (An Illinois Limited Partnership) for the year ended December 31, 1994, in conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois March 20, 1995
BALCOR PENSION INVESTORS-II (An Illinois Limited Partnership)
BALANCE SHEETS December 31, 1996 and 1995
ASSETS
1996 1995 ------------- ------------- Cash and cash equivalents $ 16,852,472 $ 2,901,014 Cash and cash equivalents - Early Investment Incentive Fund 1,969,827 308,993 Escrow deposits 113,962 Accounts and accrued interest receivable 711,458 250,265 Prepaid expenses 77,752 Deferred expenses, net of accumulated amortization of $195,352 in 1995 151,830 ------------- ------------- 19,533,757 3,803,816 ------------- ------------- Investment in loan receivable: Wrap-around loan receivable 11,324,000 Less: Loan payable - underlying mortgage 3,254,087 Allowance for potential loan loss 3,302,517 ------------- Net investment in loan receivable 4,767,396 Real estate held for sale (net of allowance of $500,000 in 1995) 27,518,370 ------------- 32,285,766 ------------- ------------- $ 19,533,757 $ 36,089,582 ============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Accounts payable $ 110,948 $ 197,880 Due to affiliates 79,549 19,370 Other liabilities 154,471 Mortgage notes payable 12,138,360 ------------- ------------- Total liabilities 190,497 12,510,081 ------------- ------------- Commitments and contingencies Limited Partners' capital (85,010 Interests issued) 23,962,626 29,692,815 Less Interests held by Early Investment Incentive Fund (8,136 in 1996 and 7,310 in 1995) (5,015,607) (4,725,704) ------------- ------------- 18,947,019 24,967,111 General Partner's capital (deficit) 396,241 (1,387,610) ------------- ------------- Total partners' capital 19,343,260 23,579,501 ------------- ------------- $ 19,533,757 $ 36,089,582 ============= =============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II (An Illinois Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL for the years ended December 31, 1996, 1995 and 1994
Partners' Capital (Deficit) Accounts ------------- -------------- -------------- General Limited Total Partner Partners ------------- -------------- --------------
Balance at December 31, 1993 $ 32,638,613 $ (1,347,331) $ 33,985,944 Repurchase of 981 Limited Partnership Interests (432,537) (432,537) Cash distributions (A) (6,734,204) (141,684) (6,592,520) Net income for the year ended December 31, 1994 3,296,690 247,252 3,049,438 ------------- -------------- -------------- Balance at December 31, 1994 28,768,562 (1,241,763) 30,010,325 Repurchase of 1,433 Limited Partnership Interests (537,463) (537,463) Cash distributions (A) (8,563,222) (439,219) (8,124,003) Net income for the year ended December 31,1995 3,911,624 293,372 3,618,252 ------------- -------------- -------------- Balance at December 31, 1995 23,579,501 (1,387,610) 24,967,111 Repurchase of 826 Limited Partnership Interests (289,903) (289,903) Cash distributions (A) (17,140,072) (715,501) (16,424,571) Deemed distribution (B) (93,119) (93,119) Net income for the year ended December 31, 1996 13,286,853 2,499,352 10,787,501 ------------- -------------- -------------- Balance at December 31, 1996 $ 19,343,260 $ 396,241 $ 18,947,019 ============= ============== ==============
(A) Summary of cash distributions paid per Limited Partnership Interest:
1996 1995 1994 ------------- -------------- --------------
First Quarter $ 6.00 $ 5.00 $ 5.00 Second Quarter 6.00 30.00 47.50 Third Quarter 114.00 63.18 25.00 Fourth Quarter 87.00 5.00 5.00
(B) This amount represents a state withholding tax paid on behalf of the Limited Partners relating to the gain on the sale of the Cumberland Pines Apartments.
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II (An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------- -------------- -------------- Income: Interest on loans receivable $ 940,283 $ 1,770,802 $ 1,991,074 Less interest on loans payable - underlying mortgages 177,681 319,438 466,076 ------------- -------------- -------------- Net interest income on loans 762,602 1,451,364 1,524,998 Income from operations of real estate held for sale 1,347,251 2,215,579 1,344,513 Interest on short-term investments 324,895 358,245 441,103 Participation income 410,493 240,377 223,610 Prepayment premium 291,000 Recovery of losses on loans, real estate and accrued interest receivable 3,402,517 700,000 1,200,000 ------------- -------------- -------------- Total income 6,247,758 4,965,565 5,025,224 ------------- -------------- -------------- Expenses: Provision for potential losses on loans, real estate and accrued interest receivable 284,573 700,000 1,200,000 Administrative 636,757 353,941 528,534 ------------- -------------- -------------- Total expenses 921,330 1,053,941 1,728,534 ------------- -------------- -------------- Income before gain on sale of loan receivable, gains on sales of real estate and extraordinary item 5,326,428 3,911,624 3,296,690
Gain on sale of loan receivable 306,759 Gains on sales of real estate 8,227,212 ------------- -------------- -------------- Income before extraordinary item 13,860,399 3,911,624 3,296,690
Extraordinary Item: Debt extinguishment expense (573,546) ------------- -------------- -------------- Net Income $ 13,286,853 $ 3,911,624 $ 3,296,690 ============= ============== ============== Income before extraordinary item allocated to General
Partner $ 2,542,368 $ 293,372 $ 247,252 ============= ============== ============== Income before extraordinary item allocated to Limited Partners $ 11,318,031 $ 3,618,252 $ 3,049,438 ============= ============== ============== Income before extraordinary item per average number of Limited Partnership Interests outstanding (77,375 in 1996, 78,453 in 1995 and 79,768 in 1994) $ 146.28 $ 46.12 $ 38.23 ============= ============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II (An Illinois Limited Partnership)
STATEMENTS OF INCOME AND EXPENSES for the years ended December 31, 1996, 1995 and 1994 (Continued)
1996 1995 1994 ------------- -------------- -------------- Extraordinary item allocated to General Partner $ (43,016) None None ============= ============== ============== Extraordinary item allocated to Limited Partners $ (530,530) None None ============= ============== ============== Extraordinary item per average number of Limited Partnership Interests outstanding (77,375 in 1996) $ (6.86) None None ============= ============== ============== Net income allocated to General Partner $ 2,499,352 $ 293,372 $ 247,252 ============= ============== ============== Net income allocated to Limited Partners $ 10,787,501 $ 3,618,252 $ 3,049,438 ============= ============== ============== Net income per average number of Limited Partnership Interests outstanding (77,375 in 1996, 78,453 in 1995 and 79,768 in 1994) $ 139.42 $ 46.12 $ 38.23 ============= ============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II (An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------- -------------- -------------- Operating activities: Net income $ 13,286,853 $ 3,911,624 $ 3,296,690 Adjustments to reconcile net income to net cash provided by operating activities: Debt extinguishment expense 99,229 Gain on sale of loan receivable (306,759) Gain on sale of real estate (8,227,212) Recovery of losses on loans, real estate and accrued interest receivable (3,402,517) (700,000) (1,200,000) Provision for potential losses on loans, real estate and accrued interest receivable 284,573 700,000 1,200,000 Collection of interest income due at maturity 943,117 Amortization of deferred expenses 52,601 50,954 62,998 Payment of deferred expenses (20,233) Settlement of litigation (895,162) Net change in: Escrow deposits 113,962 (59,568) 34,662 Escrow deposits - restricted 81,159 138,820 Accounts and accrued interest receivable (461,193) (30,451) 192,163 Prepaid expenses 77,752 (65,709) (12,043) Accounts payable (86,932) 89,424 (24,685) Due to affiliates 60,179 (63,680) 45,919 Other liabilities (154,471) (28,244) (189,331) ------------- -------------- -------------- Net cash provided by operating activities 1,336,065 3,885,509 3,572,915 ------------- -------------- -------------- Investing activities: Collection of principal on loans receivable 2,400,000 12,050,000 Proceeds from sale of loan
receivable 9,153,755 Costs incurred in connection with sale of loan receivable (339,500) Improvements to real estate (327,184) (106,295) (103,694) Proceeds from sale of real estate 36,887,019 Costs incurred in connection with sales of real estate (998,826) ------------- -------------- -------------- Net cash provided by investing activities 44,375,264 2,293,705 11,946,306 ------------- -------------- --------------
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II (An Illinois Limited Partnership)
STATEMENTS OF CASH FLOWS for the years ended December 31, 1996, 1995 and 1994 (Continued)
1996 1995 1994 ------------- -------------- -------------- Financing activities: Distributions to Limited Partners $(16,424,571) $ (8,124,003) $ (6,592,520) Deemed distribution to Limited Partners (93,119) Distributions to General Partner (715,501) (439,219) (141,684) Increase in cash and cash equivalents - Early Investment Incentive Fund (1,660,834) (270,755) (35,905) Repurchase of Limited Partnership Interests (289,903) (537,463) (432,537) Principal payments on underlying loans payable (437,583) (504,499) (540,452) Repayment of underlying loans payable (943,416) (926,667) Principal payments on mortgage notes payable (137,122) (158,327) (195,857) Repayment of mortgage notes payable (12,001,238) (3,369,552) ------------- -------------- -------------- Cash used in financing activities (31,759,871) (10,977,682) (12,235,174) ------------- -------------- --------------
Net change in cash and cash equivalents 13,951,458 (4,798,468) 3,284,047 Cash and cash equivalents at beginning of year 2,901,014 7,699,482 4,415,435 ------------- -------------- -------------- Cash and cash equivalents at end of year $ 16,852,472 $ 2,901,014 $ 7,699,482 ============= ============== ==============
The accompanying notes are an integral part of the financial statements.
BALCOR PENSION INVESTORS-II (An Illinois Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Partnership Termination:
The Partnership Agreement provides for the dissolution of the Partnership upon the occurrence of certain events, including the disposition of all interests in real estate. The Partnership sold its remaining property, Parkway Distribution Center, in December 1996. The Partnership has retained a portion of the cash to satisfy obligations of the Partnership as well as establish a reserve for contingencies. The timing of the termination of the Partnership and final distribution of cash will depend upon the nature and extent of liabilities and contingencies which exist or may arise. Such contingencies may include legal and other fees stemming from litigation involving the Partnership including, but not limited to, the lawsuit as discussed in Note 10 of Notes to Financial Statements. In the absence of any contingency, the reserves will be paid within twelve months of the last property being sold. In the event a contingency exists, reserves may be held by the Partnership for a longer period of time.
2. Accounting Policies:
(a) The preparation of the financial statements in conformity with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates.
(b) The Partnership recorded wrap-around mortgage loans at the face amount of the mortgage instrument, which included the outstanding indebtedness of the borrower under the terms of the underlying mortgage obligation. The underlying mortgage obligation was recorded as a reduction of the wrap-around mortgage loan and the resulting balance represented the Partnership's net advance to the borrower. The Partnership was responsible for making periodic payments to the underlying mortgage lender only to the extent that payments as required by the wrap-around mortgage agreement were received by the Partnership from the borrower.
(c) Income on loans was recorded as earned in accordance with the terms of the related loan agreements. The accrual of interest was discontinued when a loan became ninety days contractually delinquent or sooner when, in the opinion of the General Partner, an impairment had occurred in the value of the collateral property securing the loan. Income on non-accrual loans or loans which were otherwise not performing in accordance with their terms was recorded on a cash basis.
Various loan agreements provided for participation by the Partnership in increases in value of the collateral property when the loan was repaid or refinanced. In addition, certain loan agreements allowed the Partnership to receive a percentage of rental income exceeding a base amount. Participation income is reflected in the accompanying Statements of Income and Expenses when received.
Income from operations of real estate held for sale is reflected in the accompanying Statements of Income and Expenses net of related direct operating expenses.
(d) Loan losses on mortgage notes receivable were charged to income and an allowance account was established when the General Partner believed the loan balance would not be recovered. The General Partner assessed the collectibility of each loan on a periodic basis through a review of the collateral property operations, the property value and the borrower's ability to repay the loan. Upon foreclosure, the loan net of the allowance was transferred to real estate held for sale after the fair value of the property, less costs of disposal was assessed. Upon the transfer to real estate held for sale, a new basis in the property was established.
Effective January 1, 1995 the Partnership adopted Statement of Financial Accounting Standards, No. 121 (SFAS 121), ("Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of"). Under SFAS 121, the General Partner periodically assesses, but not less than on an annual basis, the fair value of its real estate properties held for sale. The General Partner estimates the fair value of its properties based on the current sales price less estimated closing costs. Changes in the property's fair value is recorded by an adjustment to the property allowance account and is recognized in the income statement as an increase or decrease through recovery income or a provision for loss in the period the change in fair value is determined. The General Partner considers the methods referred to above to result in a reasonable measurement of a property's fair value, unless other factors affecting the property's value indicate otherwise.
(e) Deferred expenses consist of loan application and processing fees and mortgage brokerage fees which are amortized over the terms of the respective agreements, and leasing commissions which are amortized over the life of each respective lease. Upon sale, any remaining balance is recognized as debt extinguishment expense and classified as an extraordinary item.
(f) The Financial Accounting Standard Board's Statement No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. Since quoted market prices are not available for the Partnership's financial instruments, fair values have been based on estimates using present value techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument. Statement No. 107 does not apply to all balance sheet items and excludes certain financial instruments and all non-financial instruments such as real estate from its disclosure requirements.
(g) The Partnership records repurchases of Interests by the Early Investment Incentive Fund as a reduction of Partners' Capital (see Note 3). Cash and cash equivalents not yet utilized to repurchase Interests, but which are part of the Early Investment Incentive Fund, are classified as restricted assets of the Partnership.
(h) Revenue is recognized on an accrual basis in accordance with generally accepted accounting principles.
(i) Income from operating leases with significant abatements and/or scheduled rent increases was recognized on a straight line basis over the respective lease term. Service income included reimbursements from operating costs such as real estate taxes, maintenance and insurance and was recognized as revenue in the period the applicable costs were incurred.
(j) Cash and cash equivalents include all unrestricted, highly liquid investments with an original maturity of three months or less. Cash is held or invested in one financial institution.
(k) The Partnership is not liable for Federal income taxes and each partner recognizes his proportionate share of the Partnership income or loss in his tax return; therefore, no provision for income taxes is made in the financial statements of the Partnership.
(l) For financial statement purposes, in previous years partners were allocated income and loss in accordance with the provisions in the Partnership Agreement. In order for the capital accounts of the General Partner and Limited Partners to appropriately reflect their respective remaining economic interests as provided for in the Partnership Agreement, the General Partner was allocated additional income in 1996 for financial statement purposes.
(m) Several reclassifications have been made to the previously reported 1994 financial statements to conform with the classification used in 1996 and 1995, including a reclassification of mortgage servicing fees to administrative expenses. These reclassifications have not changed the 1994 results.
3. Partnership Agreement:
The Partnership was organized on January 23, 1981. The Partnership Agreement provides for Balcor Mortgage Advisors to be the General Partner and for the admission of Limited Partners through the sale of Limited Partnership Interests at $1,000 per Interest, 85,010 of which were sold on or prior to March 15, 1982, the termination date of the offering.
For financial statement purposes, profits and losses are allocated 92.5% to the Limited Partners, of which 2.5% relates to the Early Investment Incentive Fund, and 7.5% to the General Partner.
To the extent that Cash Flow is distributed, distributions will be made as follows: (i) 90% of such Cash Flow will be distributed to the Limited Partners, (ii) 7.5% of such Cash Flow will be distributed to the General Partner, and (iii) 2.5% of such Cash Flow will be set aside in the Early Investment Incentive Fund ("Fund") for payment on dissolution of the Partnership to certain Early Investors if necessary for them to receive a return of their Original Capital plus a 22% Cumulative Return. Amounts, if any, remaining in the Fund after the Early Investors have received such return will be distributed 90% to all Limited Partners and 10% to the General Partner.
Amounts placed in the Fund may, at the sole discretion of the General Partner and subject to certain limitations, be used to repurchase Interests from existing Limited Partners. During 1996, the Fund repurchased 826 Interests at a cost of $289,903. In February 1997, the Partnership discontinued the repurchase of Interests from Limited Partners. Distributions of Cash Flow and Mortgage Reductions pertaining to such repurchased Interests are paid to the Fund.
4. Investment in Loans Receivable:
(a) The Alzina Office Building wrap-around loan receivable, which was funded in 1982, had a balance of $11,324,000 at December 31, 1995. The underlying loan payable had a balance of $3,254,087 at December 31, 1995. The loan was scheduled to mature in 1997; however, the Partnership sold its interest in the loan in August 1996 as described in Note 6 of Notes to Financial Statements.
(b) The Stonegate Austin Mobile Home Park wrap-around loan receivable, which was funded in 1982, had a balance of $2,400,000 at December 31, 1994. This loan has been referred to as an impaired loan since it was previously modified and placed on non-accrual status. There was no allowance related to this loan at December 31, 1994. The loan was scheduled to mature in 1996; however, the borrower repaid the loan in full during March 1995 as described in Note 6 of Notes to Financial Statements. The underlying loan payable had a balance of $949,564 at December 31, 1994.
Net interest income relating to impaired loans would have been $44,000 in 1995 and $239,000 in 1994. Net interest income from impaired loans included in the accompanying Statements of Income and Expenses (cash and accrual basis) amounted to $286,000 in 1995 and $187,000 in 1994.
5. Allowance for Losses on Loans and Real Estate Held for Sale:
Activity recorded in the allowance for losses on loans and real estate held for sale during the three years ended December 31, 1996 is described in the table below. 1996 1995 1994 ------------ ----------- ----------- Loans: Balance at beginning of year $ 3,302,517 $ 2,602,517 $ 4,166,443 Provision charged to income None 700,000 None Recovery of provision previously charged to income (3,302,517) None (1,200,000) Direct write-off of loans against allowance None None (363,926) ------------ ------------ ------------ Balance at the end of the year None $ 3,302,517 $ 2,602,517 ============ ============ ============
Real Estate Held for Sale: Balance at beginning of year $500,000 $ 1,200,000 None Provision charged to income 284,573 None $ 1,200,000 Recovery of provision previously charged to income (100,000) (700,000) None Direct write-off of real estate held for sale against allowance (684,573) ----------- ----------- ------------- Balance at the end of the year None $ 500,000 $ 1,200,000 =========== =========== ============
6. Loan Receivable Sale and Repayments:
(a) In August 1996, the Partnership sold its interest in the $11,324,000 Alzina Office Building loan for $9,153,755. The purchaser acquired the Alzina Office Building loan receivable subject to the existing underlying mortgage loan in the amount of $2,816,504. From the proceeds of the sale, the Partnership paid $339,500 in selling costs. For financial statement purposes, the Partnership recognized a gain of $306,759 from the sale of its interest in this loan. The Partnership also recognized a recovery of the previously established loss allowance related to this loan of $3,302,517.
(b) In March 1995, the Partnership received $2,625,437 as payment in full on the Stonegate Austin wrap-around loan, from which the underlying first mortgage loan of $943,416 was repaid. The face amount of the Partnership's loan was $2,400,000. The amount received consists of the net receivable of $1,456,584 and additional interest of $225,437.
(c) In March 1994, the Partnership received $3,369,762 as payment in full on the North Arch Village Apartments' wrap-around loan, from which the underlying first mortgage loan of $926,667 was repaid. The amount received consists of the face amount of the Partnership's loan of $2,350,000, accrued interest due at maturity of $943,117 and additional interest of $76,645.
(d) In January 1994, the Partnership received $10,064,858 as payment in full on the Tudor Heights Apartments' first mortgage loan. The amount received consists of the face amount of the loan of $9,700,000, a prepayment premium of $291,000 and additional interest of $73,858. Additionally, $248,764 of interest income that had been accrued and included in the loan balance, was written off against the previously established allowance for potential loan losses.
7. Sale of Real Estate:
(a) In June 1996, the Partnership sold the Cumberland Pines Apartments in an all cash sale for $9,200,000. From the proceeds of the sale, the Partnership paid $153,200 in selling costs. In addition, the Partnership paid a state withholding tax of $93,119 relating to the gain on the sale of the property which has been recorded as a deemed distribution for financial statement purposes. The basis of the property was $5,172,532. For financial statement purposes, the Partnership recognized a gain of $3,874,268 from the sale of this property.
(b) In October 1996, the Partnership sold the Sherwood Acres - Phases I and II apartment complexes in an all cash sale for $18,725,000. From the proceeds of the sale, the Partnership paid $11,348,198 to the third party mortgage holder in full satisfaction of the first mortgage loans, $427,281 in selling costs and $453,928 in prepayment penalties. The basis of the property was $14,504,194. For financial statement purposes, the Partnership recognized a gain of $3,793,525 from the sale of these properties.
(c) In December 1996, the Partnership sold the Hollowbrook Apartments in an all cash sale for $3,000,000. From the proceeds of the sale, the Partnership paid $192,595 in selling costs. The basis of the property was $3,491,978. For financial statement purposes, the Partnership recognized no gain or loss from the sale of this property. The Partnership wrote off $684,573 against the previously established loss allowance related to this property.
(d) In December 1996, the Partnership sold the Parkway Distribution Center in an all cash sale for $6,050,000. The purchaser was given a credit of $87,981 relating to certain tenant vacancies, resulting in a net sale price of $5,962,019. From the proceeds of the sale, the Partnership paid $653,040 to the third party mortgage holder in full satisfaction of the first mortgage loans, $225,750 in selling costs and $20,389 in prepayment penalties. The basis of the property was $5,176,850. For financial statement purposes, the Partnership recognized a gain of $559,419 from the sale of this property. The Partnership also recognized a recovery of the previously established loss allowance related to this property of $100,000.
8. Mortgage Notes Payable:
Mortgage notes payable at December 31, 1995 consisted of the following:
Carrying Amount of Notes at Property 12/31/95 - ---------------- --------
Real estate held for sale: - -------------------------- Apartments: Sherwood Acres Phase I (A) $5,709,078
Sherwood Acres Phase II (A) 5,709,078
Industrial Park: Parkway Distri- bution Center (B) 720,204 ----------- Total $12,138,360 ===========
(A) This loan required monthly principal and interest payments at an annual interest rate of 9.33%. In October 1996 this property was sold. See Note 7 of Notes to Financial Statements for additional information.
(B) This loan required monthly principal and interest payments at an annual interest rate of 9.50%. In December 1996, this property was sold. See Note 7 of Notes to Financial Statements for additional information.
During the years ended December 31, 1996, 1995 and 1994, the Partnership incurred interest expense of $960,788, $1,141,917 and $1,282,001 and paid interest of $960,788, $1,135,643 and $1,282,001, respectively.
9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:
Year Ended Year Ended Year Ended 12/31/96 12/31/95 12/31/94 -------------- -------------- -------------- Paid Payable Paid Payable Paid Payable ------ ------- ------ ------- ------ ------- Mortgage servicing fees $8,011 None $11,901 $920 $ 15,231 $1,185 Property management fees None None None None 235,885 None Reimbursement of expenses to the General Partner, at cost: Accounting 13,645 $11,075 60,318 4,099 70,948 31,360 Data processing 4,304 1,602 20,626 1,619 33,480 7,511 Investor communica- tions 8,378 None 13,488 6,530 Legal 11,805 9,274 17,089 1,530 4,142 6,218 Portfolio management 59,692 45,995 93,125 11,176 42,771 24,417 Other 19,934 11,603 5,031 26 20,377 5,829
The Partnership participates in an insurance deductible program with other affiliated partnerships in which the program pays claims up to the amount of the deductible under the master insurance policies for its properties. The program is administered by an affiliate of the General Partner who receives no fee for administering the program; however, the General Partner is reimbursed for program expenses. The Partnership paid premiums to the deductible insurance program of $8,915, $39,319 and $73,320 in 1996, 1995 and 1994, respectively.
Allegiance Realty Group, Inc., an affiliate of the General Partner managed all of the Partnership's properties, except for the Parkway Distribution Center, until the affiliate was sold to a third party in November 1994.
10. Contingency:
The Partnership is currently involved in a lawsuit whereby the Partnership, the General Partner and certain third parties have been named as defendants seeking damages relating to tender offers to purchase interests in the Partnership and nine affiliated partnerships initiated by the third party defendants in 1996. The defendants continue to vigorously contest this action. The action has been dismissed with prejudice and plaintiffs have filed an appeal. It is not determinable at this time whether or not an unfavorable decision in this action would have a material adverse impact on the financial position, operations and liquidity of the Partnership. The Partnership believes it has meritorious defenses to contest the claims.
11. Fair Value of Financial Instruments:
As of December 31, 1996 and 1995, the carrying amounts of cash and cash equivalents, accounts and accrued interest receivable and accounts payable approximates fair value.
As of December 31, 1995, the fair value of the Partnership's investment in the wrap-around loan receivable approximated its carrying value of $8,021,483. The fair value of the underlying loan payable was $3,079,542 and the carrying value was $3,254,087.
As of December 31, 1995, the fair value of the mortgage notes payable was based on borrowing rates available to the Partnership at the end of 1995 for mortgage loans with similar terms and maturities, which approximated the carrying value.
12. Settlement of Litigation:
A settlement has received final approval by the court in November 1996 in the class action, Paul Williams and Beverly Kennedy, et. al. v. Balcor Pension Investors, et. al. upon the terms described in the notice to class members in September 1996. The settlement had no material impact on the Partnership.
13. Extraordinary Item:
In connection with the 1996 sale of the Sherwood Acres-Phases I and II apartment complexes, the Partnership paid prepayment penalties of $453,928 and wrote off the remaining unamortized deferred financing fees related to the property of $99,229. In addition, the Partnership paid a prepayment penalty in connection with the 1996 sale of the Parkway Distribution Center of $20,389. These amounts were recognized as extraordinary items in 1996 and classified as debt extinguishment expenses of $573,546 for financial statement purposes.
14. Subsequent Events:
(a) In January 1997, the Partnership paid $10,243,713 ($120.50 per Interest) to the holders of Limited Partnership Interests representing the quarterly distribution of Cash Flow of $5.50 per Interest for the fourth quarter of 1996 and a special distribution of $115.00 per Interest in from proceeds received in connection with the sale of the Sherwood Acres - Phases I and II and Hollowbrook apartment complexes, and the Parkway Distribution Center.
(b) In February 1997, the General Partner made a settlement payment of $35,067 ($.47 per $1,000 Interest) to members of the class pursuant to the settlement approved by the court in November 1996 in the Paul Williams and Beverly Kennedy et. al. v. Balcor Pension Investors, et. al. class action lawsuit.