-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gwlrn3OIrAOIkxwONbkyYo4arnAH6ddnSdDQ8ugrd3Q+gXNIS0wmQXzTtdwYtjDh p8/dcV9NHXYB4DoXvIXZEA== 0000928790-97-000049.txt : 19970401 0000928790-97-000049.hdr.sgml : 19970401 ACCESSION NUMBER: 0000928790-97-000049 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEVERLY HILLS MEDICAL OFFICE PARTNERS L P CENTRAL INDEX KEY: 0000811800 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 954098476 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16689 FILM NUMBER: 97570079 BUSINESS ADDRESS: STREET 1: 388 GREENWICH ST STREET 2: 28TH FL CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2124642465 MAIL ADDRESS: STREET 1: 3 WORLD FINANCIAL CENTER CITY: NEW YORK STATE: NY ZIP: 10285 FORMER COMPANY: FORMER CONFORMED NAME: SHEARSON BEVERLY HILLS MEDICAL OFFICE PARTNERS L P DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SHEARSON BEVERLY HILLS MEDICAL PARTNERS L P DATE OF NAME CHANGE: 19870616 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to Commission file number: 33-12791 BEVERLY HILLS MEDICAL OFFICE PARTNERS, L.P. Exact name of Registrant as specified in its charter Delaware 95-4098476 State or other jurisdiction of incorporation or organization I.R.S. Employer Identification No. Attn.: Andre Anderson 3 World Financial Center, 29th Floor, New York, New York 10285 Address of principal executive offices zip code Registrant's telephone number, including area code: (212) 526-3237 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: 5,540,000 LIMITED PARTNERSHIP SECURITIES 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 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 the 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) Aggregate market value of voting stock held by non-affiliates of the Registrant: Not applicable. Documents Incorporated by Reference: Portions of Parts I, II and IV are incorporated by reference to the Registrant's Annual Report to Unitholders for the year ended December 31, 1996 filed as an exhibit under Item 14. PART I Item 1. Business (a) General Development of Business Beverly Hills Medical Office Partners, L.P., a Delaware limited partnership (the "Partnership," or the "Registrant") (formerly Shearson Beverly Hills Medical Office Partners, L.P.), was formed on March 16, 1987. The Partnership will continue until December 31, 2037 in accordance with the terms of its Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"), unless terminated earlier pursuant thereto. The affairs of the Partnership are conducted by its general partner, Medical Office Properties Inc. (the "General Partner") (formerly Shearson Lehman Commercial Properties Inc.), a Delaware corporation. See Item 10 "Directors and Executive Officers of the Partnership." The Partnership was formed to acquire, upgrade, operate, and ultimately sell the Beverly Sunset Medical Building located in the Hollywood, California (the "Property"). The Partnership acquired the fee interest in the land and improvements constituting the Property on April 23, 1987 with funds from a $55,400,000 public offering (the "Offering") of 5,540,000 limited partnership securities ("Units"). (b) Financial Information About Industry Segments The Partnership's sole business is the ownership and operation of the Property. All of the Partnership's revenues, operating profits or losses and assets relate solely to such industry segment. (c) Narrative Description of Business Objectives The Partnership's principal objectives were to: (i) provide quarterly cash distributions, a portion of which were anticipated to be non-taxable due to depreciation deductions; (ii) preserve and protect capital; and (iii) achieve long-term appreciation in the value of the Property for distribution upon sale. However, due principally to changes in the health care industry which have weakened the demand for medical office space, objective (i) has not been achieved, and it is unlikely that objectives (ii) and (iii) can be achieved. Property Management Property management services are provided by Voit Management Company, L.P. ("Voit") pursuant to a Management Agreement executed on November 1, 1992. In May 1996, the Partnership terminated its exclusive leasing agreement with Ramsey-Shilling Commercial Real Estate Services, Inc. and engaged the services of CB Commercial Real Estate Group, Inc. ("CB Commercial") in June 1996. CB Commercial is one of the largest real estate brokerage firms in the nation and has significant experience in leasing medical office space in the market where the Property is located. Mortgage Financing The Property is encumbered by a mortgage in the amount of $13,902,293 at December 31, 1996. Information concerning the note's maturity date, interest rate and repayment is incorporated herein by reference to Note 7 "Secured Note Payable" of the Notes to the Financial Statements of the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, filed as an exhibit under Item 14. Competition The Property competes, to varying degrees, with approximately 22 buildings consisting of approximately 1.5 million square feet of space in West Los Angeles. The distinction between "Class A" and "Class B" buildings in the Property's competitive market stems primarily from location and physical appearance. The Property's immediate market includes eight buildings located primarily in the Beverly Hills central business and retail district, known as the "Golden Triangle." The Property's location outside of the "Golden Triangle" and its distance from major hospitals has constrained the rental rates achievable at the Property relative to competitive Class A buildings in the "Golden Triangle." Of the buildings which compete most directly with the Property, 10 are considered to be Class A representing an aggregate of approximately 811,000 square feet. The other 12 buildings are considered Class B space principally because of their location and parking facilities. These Class B buildings represent a total of approximately 688,000 square feet of medical space. Additional information regarding the Property and its competition is incorporated herein by reference to the section entitled "Message to Investors" in the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, filed as an exhibit under Item 14. Employees The Partnership has no employees. Item 2. Properties A detailed description of the Property, leases which are considered to be material to the Partnership's operations, and competition with respect to the specific market in which the Property is located are incorporated herein by reference to the section entitled "Message to Investors" in the Partnership's Annual Report to Unitholders for the year ended December 31, 1996 and Note 4 "Property" and Note 6 "Tenant Leases" of the Notes to the Financial Statements in the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, filed as an exhibit under Item 14. Item 3. Legal Proceedings The Registrant is not subject to any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to the Unitholders for a vote during the fourth quarter of the year for which this report is filed. PART II Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters (a) Market Information There is no established trading market for the Units, and it is not anticipated that such a market will develop in the future. (b) Holders As of December 31, 1996, there were 4,239 Unitholders. (c) Distributions of Operating Cash Flow The Partnership's initial policy was to distribute to Unitholders their allocable portion of Net Cash Flow from Operations (as defined in the Partnership Agreement incorporated herein by reference). Distributions of Net Cash Flow from Operations were paid on a quarterly basis to registered Unitholders on record dates established by the Partnership, which generally were the last day of each quarter. Since the Partnership's inception, Unitholders have received a total of $4.21 in cash distributions per original $10 Unit. Beginning with the fourth quarter of 1990, cash distributions were suspended. The General Partner determined that it was necessary to replenish the Partnership's cash reserves to cover costs associated with, among other things, future asbestos abatement, sprinklering and leasing of the individual tenant suites. Further information is incorporated herein by reference to Note 4 "Property" of the Notes to the Financial Statements in the Partnership's Annual Report to Unitholders for the year ended December 31, 1996 filed as an exhibit under Item 14. Item 6. Selected Financial Data The information set forth below should be read in conjunction with the Partnership's financial statements and notes thereto and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." For the Years Ended December 31, (dollars in thousands except per Unit data) 1996 1995 1994 1993 1992 Total Income $ 4,096 $ 4,340 $ 4,088 $ 4,398 $ 4,278 Property Operating Expenses (1,775) (1,824) (1,923) (1,894) (2,000) Depreciation and Amortization (1,897) (1,851) (1,778) (1,721) (1,657) General and Administrative Expenses(2) (237) (229) (232) (279) (264) Net Loss (901) (670) (976) (817) (1,147) Net Loss per Unit (5,540,000 outstanding) (0.16) (0.12) (0.18) (0.15) (0.21) Secured Note Payable 13,902 14,141 14,362 14,566 14,723 Total Assets 39,251 40,403 41,297 42,319 43,648 (2) including Asset Management Fees Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (a) Liquidity and Capital Resources At December 31, 1996, the Partnership had cash and cash equivalents of $1,648,513, as compared with $1,026,560 at December 31, 1995. The increase is attributable to net cash provided by operating activities exceeding cash used for real estate additions and mortgage principal payments. Accounts and other receivables decreased from $363,192 at December 31, 1995 to $105,552 at December 31, 1996. The decrease is primarily due to the receipt of real estate tax abatements for the 1992-93, 1993-94 and 1994-95 tax years in 1996. At December 31, 1996, other assets totaled $47,620, as compared to $77,695 at December 31, 1995. The decrease is due to the amortization of prepaid interest and intangible assets. Deferred rent receivable was $388,464 at December 31, 1996, as compared with $479,913 at December 31, 1995. The decrease is attributable to the straight-line amortization of base rent, offset by lease renewals and expansions in 1996. Accounts payable and accrued expenses were $213,517 at December 31, 1996, as compared to $237,039 at December 31, 1995. The decrease is primarily due to the payment of accrued professional fees and the payment of accrued expenses associated with tenant expansions and improvements. In order to lease vacant space at the Property, the Partnership must pay leasing commissions and tenant improvement costs associated with new leases. The amount of such costs remains uncertain at this time and will depend upon the extent of leasing activity and tenant improvements. The General Partner intends to fund such costs from net cash flow from operations and the Partnership's cash reserves to the fullest extent possible. If necessary, the General Partner would seek additional borrowings. One of the retail tenants at the Property, the Hamburger Hamlet restaurant, occupying 10,351 square feet, filed for protection under Chapter 11 of the U.S. Bankruptcy Code in November 1995. Hamburger Hamlet has until April 1997 to inform the Partnership whether the restaurant will assume or reject its lease obligation. Hamburger Hamlet has informally indicated its intention to remain at the Property and continue operating the restaurant, which is its flagship location. On February 14, 1996, based upon, among other things, the advice of legal counsel, the General Partner adopted a resolution that states, among other things, if a Change of Control (as defined below) occurs, the General Partner may distribute the Partnership's cash balances not required for its ordinary course day-to-day operations. "Change of Control" means any purchase or offer to purchase more than 10% of the Units that is not approved in advance by the General Partner. In determining the amount of the distribution, the General Partner may take into account all material factors. In addition, the Partnership will not be obligated to make any distribution to any partner, and no partner will be entitled to receive any distribution, until the General Partner has declared the distribution and established a record date and distribution date for the distribution. (b) Results of Operations 1996 versus 1995 For the years ended December 31, 1996 and 1995, Partnership operations resulted in net losses of $900,981 and $669,862, respectively. The increase in net loss was primarily attributable to a decrease in other income in 1996. Rental income for the years ended December 31, 1996 and 1995 totaled $3,978,679 and $3,922,449 respectively. The increase in rental income was primarily attributable to increases in average occupancy in 1996. Interest income was $100,343 and $94,943 for the years ended December 31, 1996 and 1995, respectively. The increase was due to higher average cash balances in 1996 compared to 1995. Other income was $17,140 for the year ended December 31, 1996, compared with $322,632 for the year ended December 31, 1995. The decrease was attributable to refunds of approximately $315,000 recognized in 1995 in connection with the General Partner's successful appeal of the Property's 1992-93, 1993-94 and 1994-95 real estate tax assessments. For the years ended December 31, 1996 and 1995, property operating expenses totaled $1,774,810 and $1,824,269, respectively. The decrease was primarily due to a decrease in insurance, advertising, utilities and real estate and other taxes, and was partially offset by an increase in miscellaneous expenses and professional fees. 1995 Versus 1994 For the years ended December 31, 1995 and 1994, Partnership operations resulted in net losses of $669,862 and $976,417, respectively. The decrease in net loss was primarily attributable to an increase in other income and a decrease in property operating expenses. Rental income for the years ended December 31, 1995 and 1994 totaled $3,922,449 and $3,913,869, respectively. The increase in rental income was primarily attributable to increases in average occupancy during 1995 which resulted in an increase in base rents in 1995. For the year ended December 31, 1995, other income totaled $322,632 as compared to $118,959 for the year ended December 31, 1994. The increase was attributable to refunds of approximately $315,000 recognized in 1995 in connection with the General Partner's successful appeal of the Property's 1992-93, 1993-94 and 1994-95 real estate tax assessments. Interest income was $94,943 and $55,477, for the years ended December 31, 1995 and 1994, respectively. The increase was due to higher rates of interest earned on higher average cash balances in 1995 as compared to 1994. For the years ended December 31, 1995 and 1994, property operating expenses totaled $1,824,269 and $1,923,409, respectively. The decrease was primarily due to the successful reduction of 1995 real estate taxes as a result of the successful real estate tax appeal. Item 8. Financial Statements and Supplementary Data See Item 14(a) for a listing of the financial statements and supplementary data filed in this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Partnership The Partnership has no Directors or Executive Officers. The affairs of the Partnership are conducted through the General Partner. Certain officers and directors of the General Partner are now serving (or in the past have served) as officers or directors of entities which act as general partners of a number of limited partnerships which have sought protection under the provisions of the federal Bankruptcy Code. The partnerships which have filed bankruptcy petitions own assets which have been adversely affected by the economic conditions in the markets in which that asset is located and, consequently, the partnerships sought protection of the bankruptcy laws to protect the partnerships' assets from loss through foreclosure. The following is a list of the officers and directors of the General Partner at December 31, 1996: Name Office Rocco F. Andriola Director, President and Chief Financial Officer John H. Ng Vice President Tim E. Needham Vice President Rocco F. Andriola, 38, is a Managing Director of Lehman Brothers Inc. in its Diversified Asset Group and has held such position since October 1996. Since joining Lehman in 1986, Mr. Andriola has been involved in a wide range of restructuring and asset management activities involving real estate and other direct investment transactions. From June 1991 through September 1996, Mr. Andriola held the position of Senior Vice President in Lehman's Diversified Asset Group. From June 1989 through May 1991, Mr. Andriola held the position of First Vice President in Lehman's Capital Preservation and Restructuring Group. From 1986- 89, Mr. Andriola served as a Vice President in the Corporate Transactions Group of Shearson Lehman Brothers' office of the general counsel. Prior to joining Lehman, Mr. Andriola practiced corporate and securities law at Donovan Leisure Newton & Irvine in New York. Mr. Andriola received a B.A. from Fordham University, a J.D. from New York University School of Law, and an LL.M in Corporate Law from New York University's Graduate School of Law. John H. Ng, 46, is a Vice President of Lehman Brothers Inc. and has been employed by Lehman since November 1977. He is an asset manager in the Diversified Asset Group of Lehman and has held such position since 1985. From 1980 to 1985, Mr. Ng served as Senior Financial Analyst in the Corporate Planning and Development Department, and from 1977 to 1980, he was an analyst in the Controller's Department. Prior to joining Lehman, he served as a teaching assistant at the University of Minnesota. Mr. Ng received an M.B.A. with a concentration in corporate finance from the University of Minnesota in 1977 and a B.A. in Economics from Moorhead State University in 1975. Timothy E. Needham, 28, is an Associate of Lehman Brothers Inc. and assists in the management of commercial real estate in the Diversified Asset Group. Mr. Needham joined Lehman in September 1995. Prior to joining Lehman, Mr. Needham was a consultant with KPMG Peat Marwick LLP in the Banking and Investment Services Group from 1994-1995. Mr. Needham received his master's degree in international management from the American Graduate School of International Management in December 1993. Previous to entering graduate school, Mr. Needham worked in Tokyo for approximately one year doing market research for a Japanese firm (1991). In addition, Mr. Needham is currently a candidate for the designation of Chartered Financial Analyst, Level III. Item 11. Executive Compensation All of the Directors and Executive Officers of the General Partner are employees of Lehman. They do not receive any salaries or other compensation from the Partnership. See Item 13 below with respect to a description of certain transactions of the General Partner or its affiliates with the Partnership. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security ownership of certain beneficial owners No person (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) is known to the Partnership to be the beneficial owner of more than 5% of the outstanding Units as of December 31, 1996. (b) Security ownership of management None of the Directors or Executive Officers of the General Partner owned any units of the Partnership as of December 31, 1996. (c) Changes in control None. Item 13. Certain Relationships and Related Transactions The General Partner and certain affiliates may be reimbursed by the Partnership for certain costs as described in the Partnership Agreement which is incorporated herein by reference thereto. The General Partner is entitled to an annual asset management fee in the amount of $50,000 per year. Unpaid asset management fees as of December 31, 1996 and 1995 aggregated $335,500 and $285,500, respectively. As provided in the Partnership Agreement, the annual asset management fee was scheduled to increase to $115,000 per annum in 1991. However, the General Partner has voluntarily waived the $65,000 increase each year since 1991. First Data Investor Services Group, formerly The Shareholder Services Group, provides partnership accounting and investor relations services for the Partnership. The Partnership's transfer agent and certain tax reporting services are provided by Service Data Corporation. Both First Data Investor Services Group and Service Data Corporation are unaffiliated companies. For additional information regarding fees paid and reimbursements to the General Partner or its affiliates during 1996, 1995 and 1994, see Note 5, "Transactions With Related Parties" of the Financial Statements which are incorporated herein by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, filed as an exhibit under Item 14. PART III Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) and (2) Beverly Hills Medical Office Partners, L.P. Index to the Financial Statements Page Number Independent Auditors' Report: KPMG Peat Marwick LLP (1) Balance Sheets - At December 31, 1996 and 1995 (1) Statements of Operations for the years ended December 31, 1996, 1995 and 1994 (1) Statements of Partners' Capital (Deficit) for the years ended December 31, 1996, 1995 and 1994 (1) Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 (1) Notes to the Financial Statements (1) Schedule III - Real Estate and Accumulated Depreciation F-1 Independent Auditors' Report on Schedule III F-2 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (1) Incorporated herein by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, which is filed as an exhibit under Item 14. (3) See Exhibit Index contained herein. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of 1996. (c) Exhibits Subject to Rule 12b-32 of the Securities Exchange Act of 1934 regarding incorporation by reference, listed below are the exhibits which are filed as part of this report. References to the Registration Statement are to the Registrant's Registration Statement on Form S-11 which was declared effective by the SEC on May 7, 1987. 3.0 Amended and Restated Agreement of Limited Partnership of the Registrant is hereby incorporated by reference to Exhibit 3.0 to Form 10-K for the year ended December 31, 1988. 4.1 Depository Receipt for Depository Units in the Registrant is hereby incorporated by reference to Exhibit 4.1 to Form 10-K for the year ended December 31, 1987. 10.1 Depository Agreement between the Registrant and Shearson Lehman Commercial Properties Depository III Inc., as Assignor Limited Partner is hereby incorporated by reference to Exhibit 10.3 to the Registration Statement. 10.2 Note made by the Registrant in favor of American Savings Bank, FSB dated August 19, 1988 is hereby incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended September 30, 1988. 10.3 Deed of Trust, Assignment of Rents and Security Agreement between the Registrant and American Savings Bank, FSB dated August 19, 1988 is hereby incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter ended September 30,1988. 10.4 Indemnity Agreement between the Registrant and American Savings Bank, FSB dated August 19, 1988 is hereby incorporated by reference to Exhibit 10.7 to Form 10-Q for the quarter ended September 30, 1988. 10.5 Collateral Assignment of Lease and Rents between the Registrant and American Savings Bank, FSB dated August 19, 1988 is hereby incorporated by reference to Exhibit 10.8 to Form 10-Q for the quarter ended September 30, 1988. 10.6 Financing Statements between the Registrant and American Savings Bank, FSB dated August 19, 1988 is hereby incorporated by reference to Exhibit 10.9 to Form 10-Q for the quarter ended September 30, 1988. 10.7 Management Agreement between the Registrant and Voit Management Company, L.P. is hereby incorporated by reference to Exhibit 10.9 to Form 10-K for the year ended December 31, 1992. 13.0 Annual Report to the Unitholders for the year ended December 31, 1996. 27.0 Financial Data Schedule. 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. BEVERLY HILLS MEDICAL OFFICE PARTNERS, L.P. BY: Medical Office Properties Inc. General Partner Date: March 28, 1997 BY: /s/Rocco F. Andriola Rocco F. Andriola Director, President and Chief Financial Officer 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 in the capacities and on the dates indicated. MEDICAL OFFICE PROPERTIES INC. General Partner Date: March 28, 1997 BY: /s/Rocco F. Andriola Rocco F. Andriola Director, President and Chief Financial Officer Date: March 28, 1997 BY: /s/John H. Ng John Ng Vice President Date: March 28, 1997 BY: /s/Timothy E. Needham Timothy E. Needham Vice President EX-13 2 1996 ANNUAL REPORT TO UNITHOLDERS FOR BEVERLY HILLS MEDICAL OFFICE PARTNERS, L.P. Beverly Hills Medical Office Partners, L.P. (the "Partnership") was formed in 1987 for the purpose of purchasing, operating, refurbishing, and ultimately selling the Beverly Sunset Medical Building located at 9201 Sunset Boulevard in West Hollywood, California (the "Property"). The Partnership is managed by Medical Office Properties Inc. (the "General Partner"). The Property, constructed in 1964, is a nine-story medical office building located approximately one block east of the City of Beverly Hills on the border between the Cities of Los Angeles and West Hollywood. The Property contains 158,585 net rentable square feet of space which is leased primarily to sole or small-group medical practitioners. Approximately 11% of the Property's rentable square feet is ground floor retail space currently occupied by a restaurant, pharmacy, real estate brokerage firm, optometrist and an overnight package delivery service. The Property's parking facilities are leased to AMPCO Parking through September 30, 1999. Contents 1 Message to Investors 4 Financial Statements 7 Notes to the Financial Statements 11 Independent Auditors' Report Administrative Inquiries Performance Inquiries/Form 10-Ks Address Changes/Transfers First Data Investor Services Group Service Data Corporation P.O. Box 1527 2424 South 130th Circle Boston, Massachusetts 02104-1527 Omaha, Nebraska 68144-2596 Attn.: Financial Communications 800-223-3464 800-223-3464 Message to Investors Presented for your review is the 1996 Annual Report for Beverly Hills Medical Office Partners, L.P. This report includes an overview of the market conditions affecting the Beverly Sunset Medical Building and provides an update on leasing progress and capital improvements at the Property. Also included in this report are the Partnership's 1996 audited financial statements. Overview Operations at the Property remained relatively stable during 1996, although leasing efforts were significantly hindered by strong competition in the medical office space market and the ongoing consolidation and transformation of the health care industry. Overall, the Property posted a modest 3.2% increase in occupancy at year-end 1996 compared to the previous year, primarily as a result of expansions by existing tenants. California continues to remain on the forefront of the national shift of the health care industry away from independent fee-for- service doctors towards health maintenance organizations ("HMOs") and managed care networks. It is estimated that approximately 85% to 90% of Southern Californians with medical insurance are enrolled in either an HMO or a managed care network. The continued consolidation of the health care industry has placed increasing pressures on sole practitioners, who comprise the majority of the Property's tenant base, to control expenses and minimize risk in this uncertain business environment. Therefore, many sole practitioners have opted to reduce their office space requirements by consolidating their practices with other doctors or contracting with HMOs and managed care networks, thereby reducing overall demand for medical office space. As a result of such changes, the vacancy rate at year-end 1996 for medical office space in West Los Angeles where the Property is located was approximately 17%, as compared to 16% one year earlier. Since managed care networks and HMOs prefer to be located in close proximity to hospitals, it has become even more difficult for the Property to attract tenants due to its location on the periphery of the "Golden Triangle", the submarket surrounding the Cedars-Sinai Medical Center. These factors have further heightened competition which has depressed the Property's rental rates and necessitated the use of rental concessions in order to attract and retain tenants. The Partnership has responded to these competitive pressures by focusing on effectively managing the Property in order to retain the existing tenant base and aggressively marketing the vacant space. As previously reported, in an attempt to improve leasing results, the General Partner retained CB Commercial Real Estate Group, Inc. ("CB Commercial") as the Property's new leasing broker in June 1996. CB Commercial, one of the largest commercial real estate brokerage firms in the country, has significant experience in leasing medical office space in West Los Angeles. Leasing Progress The Partnership successfully renewed eight leases totaling 12,771 square feet which were scheduled to expire in 1996. Furthermore, one month-to-month tenant converted to a long-term lease in 1996. Additionally, four tenants expanded their space by approximately 5,054 square feet. As a result, the Property's occupancy level increased to 72.8% at year-end 1996, as compared with 69.6% at year-end 1995. In 1997, 11 leases representing 21,107 square feet, or approximately 13.3% of the Property's total rentable area, are scheduled to expire. One of these leases, representing approximately 2,466 square feet, was already renewed in early 1997 with the tenant expanding by 1,223 square feet. Although we will attempt to renew the remaining 10 leases, there can be no assurance of success in light of the extremely competitive market conditions. In addition, CB Commercial will aggressively market the Property's vacant space and has launched a direct mail campaign highlighting the Property's designation as the "Medical Office Building of the Year" by the Building Owners and Managers Association in each of the Southern California, regional and international competitions. In November 1995, one of the Property's retail tenants occupying 10,351 square feet, the Hamburger Hamlet restaurant, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The date by which Hamburger Hamlet must either assume or reject its lease obligation to the Property was extended by the bankruptcy court at the request of Hamburger Hamlet to April 1997. The tenant, which has remained current on its rental obligation since filing for bankruptcy protection, has informally indicated its intention to remain at the Property which is its flagship location. Capital Improvements During 1996, the General Partner continued to enhance the Property's overall appearance and operating efficiency by making selective capital improvements, including the installation of security gates at the entrances to the parking garage and the retrofit of the lighting in the common areas. Additionally, as part of the ongoing building maintenance program, the heating and ventilation systems ("HVAC") retrofit of the second and fifth floors is scheduled for 1997, thereby completing the entire HVAC retrofit of the Property. We continue to install sprinklers and other fire/life-safety hardware in accordance with the safety codes of the City of West Hollywood. As previously reported, the City of West Hollywood adopted an ordinance which originally required the installation of sprinklers and other fire/life-safety hardware in all existing high-rise buildings by January 1992. The deadline was subsequently extended to February 3, 1997. Our initial plan, which was approved by the City, involved performing the remaining retrofit during the remodeling of tenant suites in connection with new leases and renewals. Under this plan, approximately 36% of the tenant areas and 100% of all common areas have been brought into compliance. In late 1996, the Partnership received a further extension of the sprinkler retrofit deadline to December 7, 1998. It is currently anticipated that any remaining retrofit work which is not completed in the course of executing lease renewals and new leases will be commenced in the second quarter of 1998. Financial Highlights The following chart presents selected financial results of the Partnership for the years ended December 31, 1996 and 1995: 1996 1995 Total Income $4,096,162 $4,340,024 Property Operating Expenses 1,774,810 1,824,269 Net Loss 900,981 669,862 Net Cash Flow from Operations 1,207,676 675,539 - - Total Income decreased in 1996 by $243,862 primarily due to the recognition of real estate property tax refunds totaling approximately $315,000 in the previous year in connection with the Partnership's successful appeal of the Property's 1992-93, 1993-94 and 1994-95 real estate tax assessments. - - Property Operating Expenses declined when compared to 1995 primarily due to a decrease in insurance, advertising, utilities expenses and real estate and other taxes. Such decreases were partially offset by an increase in miscellaneous expenses and professional fees. - - The increase in Net Loss for 1996 of $231,119 is primarily due to the recognition of the real estate property tax refunds in 1995. Similarly, Net Cash Flow from Operations was higher in 1996 primarily due to the receipt of the property tax refunds which were accrued in 1995 and an adjustment in the monthly funding of escrow amounts for real estate taxes. Although the Property is generating positive cash flow from operations after debt service and administrative costs, net cash flow is being retained to replenish the Partnership's cash reserves. These reserves are necessary to fund, among other things, the Property's leasing costs and the installation of sprinkler and fire/life-safety equipment. General Information As you may be aware, there have been many recent attempts by third parties for their own benefit, to purchase units of limited partnerships similar to your Partnership. Frequently, these third parties use partial "tender offers" to purchase units at grossly inadequate prices that do not reflect the underlying value of the partnership's assets. According to published industry sources, in the overwhelming majority of such offers, most unitholders have rejected them due to their inadequacy and have not tendered their units. Please be advised that if any tender offer is made for your Units, we will endeavor to provide you with information regarding our position with respect to such offer on a timely basis. Summary As previously mentioned, the continued consolidation and transformation of the health care industry has further intensified the already competitive leasing conditions in the medical office space market. In view of the significant impact of on-going changes in the health care industry, the General Partner intends to carefully examine the possibility of marketing the Property for sale in 1997. In the interim, we intend to remain attentive to the needs of our existing tenants and will attempt to renew the leases scheduled to expire during the year. However, we currently anticipate that the Partnership is likely to continue to encounter difficulty in leasing additional space at the Property. We will keep you apprised of developments affecting the Property in future investor correspondence. Very truly yours, Medical Office Properties Inc. The General Partner /s/ Rocco F. Andriola Rocco F. Andriola President March 28, 1997 Balance Sheets At December 31, At December 31, 1996 1995 Assets Real estate, at cost: Land $ 8,379,434 $ 8,379,434 Building, building improvements and equipment 41,921,813 41,623,252 50,301,247 50,002,686 Less accumulated depreciation (14,031,118) (12,281,843) 36,270,129 37,720,843 Cash and cash equivalents 1,648,513 1,026,560 Restricted cash 498,257 468,992 Accounts and other receivables 105,552 363,192 Leasing commissions and prepaid expenses, net of accumulated amortization of $212,762 in 1996 and $206,634 in 1995 292,542 265,438 Other assets, net of accumulated amortization of $253,135 in 1996 and $223,060 in 1995 47,620 77,695 Deferred rent receivable 388,464 479,913 Total Assets $39,251,077 $40,402,633 Liabilities and Partners' Capital (Deficit) Liabilities: Accounts payable and accrued expenses $ 213,517 $ 237,039 Due to affiliates 337,765 337,139 Security deposits payable 179,725 168,836 Secured note payable 13,902,293 14,140,861 Total Liabilities 14,633,300 14,883,875 Partners' Capital (Deficit): General Partner (206,331) (206,331) Limited Partners (5,540,000 units outstanding) 24,824,108 25,725,089 Total Partners' Capital 24,617,777 25,518,758 Total Liabilities and Partners' Capital $39,251,077 $40,402,633 Statements of Partners' Capital (Deficit) For the years ended December 31, 1996, 1995 and 1994 General Limited Partner Partners Total Balance at December 31, 1993 $(206,331) $27,371,368 $27,165,037 Net loss -- (976,417) (976,417) Balance at December 31, 1994 (206,331) 26,394,951 26,188,620 Net loss -- (669,862) (669,862) Balance at December 31, 1995 (206,331) 25,725,089 25,518,758 Net loss -- (900,981) (900,981) Balance at December 31, 1996 $(206,331) $24,824,108 $24,617,777 Statements of Operations For the years ended December 31, 1996 1995 1994 Income Rental $3,978,679 $3,922,449 $3,913,869 Interest 100,343 94,943 55,477 Other 17,140 322,632 118,959 Total Income 4,096,162 4,340,024 4,088,305 Expenses Depreciation and amortization 1,897,408 1,851,343 1,777,812 Property operating 1,774,810 1,824,269 1,923,409 Interest 1,087,561 1,105,295 1,121,714 General and administrative 187,364 178,979 182,357 Asset management fee 50,000 50,000 50,000 Bad debt -- -- 9,430 Total Expenses 4,997,143 5,009,886 5,064,722 Net Loss $ (900,981) $ (669,862) $(976,417) Net Loss Allocated: To the General Partner $ -- $ -- $ -- To the Limited Partners (900,981) (669,862) (976,417) $(900,981) $ (669,862) $(976,417) Per limited partnership unit (5,540,000 outstanding) $(0.16) $(0.12) $(0.18) Statements of Cash Flows For the years ended December 31, 1996 1995 1994 Cash Flows From Operating Activities: Net loss $(900,981) $(669,862) $(976,417) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,897,408 1,851,343 1,777,812 Increase (decrease) in cash arising from changes in operating assets and liabilities: Restricted cash (29,265) (179,139) 2,996 Accounts and other receivables 257,640 (322,612) (19,100) Prepaid expenses (96,568) (11,326) (101,056) Deferred rent receivable 91,449 10,391 (107,014) Accounts payable and accrued expenses (23,522) (42,378) 43,244 Due to affiliates 626 50,086 50,000 Security deposits payable 10,889 (10,964) 9,499 Net cash provided by operating activities 1,207,676 675,539 679,964 Cash Flows From Investing Activities: Additions to real estate (327,651) (645,980) (358,973) Accounts payable - real estate (19,504) (33,010) 55,876 Net cash used for investing activities (347,155) (678,990) (303,097) Cash Flows From Financing Activities: Payments of principal on secured note payable (238,568) (220,831) (204,415) Net cash used for financing activities (238,568) (220,831) (204,415) Net increase (decrease) in cash and cash equivalents 621,953 (224,282) 172,452 Cash and cash equivalents, beginning of year 1,026,560 1,250,842 1,078,390 Cash and cash equivalents, end of year $1,648,513 $1,026,560 $1,250,842 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for interest $1,087,561 $1,105,295 $1,121,714 Supplemental Schedule of Non-Cash Investing Activities: Write-off of fully depreciated tenant improvements $ 48,594 $ -- $ 393,073 Notes to the Financial Statements December 31, 1996, 1995 and 1994 1. Organization Beverly Hills Medical Office Partners, L.P., formerly Shearson Beverly Hills Medical Office Partners, L.P., a limited partnership (the "Partnership"), was organized on March 16, 1987 under the laws of the State of Delaware for the purpose of acquiring, upgrading, operating and ultimately disposing of the Beverly Sunset Medical Building (the "Property"). The Property was acquired with funds obtained from a $55,400,000 public offering of 5,540,000 limited partnership securities ("Units"). The general partner is Medical Office Properties Inc. (the "General Partner"), formerly Shearson Lehman Commercial Properties Inc., a Delaware corporation affiliated with Lehman Brothers Inc. The General Partner manages the business affairs and operations of the Partnership. The Partnership will terminate on December 31, 2037, or sooner, in accordance with the terms of the Partnership Agreement. On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman Brothers Inc. changed its name to Lehman Brothers Inc. The transaction did not affect the ownership of the General Partner. However, the assets acquired by Smith Barney included the name "Shearson." Consequently, effective October 29, 1993, Shearson Lehman Commercial Properties Inc. changed its name to Medical Office Properties Inc. and effective December 31, 1993, the Partnership changed its name to Beverly Hills Medical Office Partners, L.P. to delete any reference to "Shearson." On February 14, 1996, based upon, among other things, the advice of legal counsel, Skadden, Arps, Slate, Meagher & Flom, the General Partner adopted a resolution that states, among other things, if a Change of Control (as defined below) occurs, the General Partner may distribute the Partnership's cash balances not required for its ordinary course day-to-day operations. "Change of Control" means any purchase or offer to purchase more than 10% of the Units that is not approved in advance by the General Partner. In determining the amount of the distribution, the General Partner may take into account all material factors. In addition, the Partnership will not be obligated to make any distribution to any partner, and no partner will be entitled to receive any distribution, until the General Partner has declared the distribution and established a record date and distribution date for the distribution. 2. Significant Accounting Policies Building, Building Improvements and Equipment - Building, building improvements and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based upon estimated useful lives of thirty years for the building and ten years for personal property. Tenant improvements are depreciated over the respective lives of the leases using the straight-line method. Acquisition fees and expenses have been added to the basis of the Property and are depreciated over the lives of the building and personal property. Accounting for Impairment - In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. FAS 121 also addresses the accounting for long- lived assets that are expected to be disposed of. The Partnership adopted FAS 121 during the fourth fiscal quarter of 1995. The Partnership completed a review of recoverability of the carrying amount of the Property based upon an estimate of undiscounted cash flows expected to result from the Property's use and eventual disposition. Based on current estimates, the adoption of FAS 121 had no impact on the financial statements. However, if long-term financing cannot be arranged in August 1998 or the Property is marketed for sale, it is reasonably possible that a change in the Partnership's assessment of recoverability could occur. Loan Costs - Included in other assets are loan costs that are being amortized using the straight-line method over the term of the secured note payable. Leasing Commissions - Leasing commissions are amortized using the straight-line method over the terms of the respective leases. Deferred Rent Receivable - Deferred rent receivable consists of rental income which is recognized on a straight-line basis over the non-cancelable term of the leases which will not be collected until later periods as a result of rental concessions and/or scheduled rent increases. Income Taxes - No provision for income taxes has been made in the financial statements since income, losses and tax credits are passed through to the individual partners. Cash and Cash Equivalents - Cash and cash equivalents consist of short-term highly liquid investments which have maturities of three months or less from the date of issuance. The carrying value approximates fair value because of the short maturity of these instruments. Restricted Cash - Restricted cash includes security deposits, insurance and real estate tax escrows. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management 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 differ from those estimates. Management's review of the recoverability of the carrying amount of the Property and related accounts is one such estimate. Fair Value of Financial Instruments - Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS 107"), requires that the Partnership disclose the estimated fair values of its financial instruments. Fair values generally represent estimates of amounts at which a financial instrument could be exchanged between willing parties in a current transaction other than in forced liquidation. Fair value estimates are subjective and are dependent on a number of significant assumptions based on management's judgment regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. In addition, FAS 107 allows a wide range of valuation techniques, therefore, comparisons between entities, however similar, may be difficult. Reclassifications - Certain balances in the prior year financial statements have been reclassified to conform to the 1996 presentation. 3. Partnership Allocations Net income will generally be allocated based on the amounts of cash distributions to each partner. Net losses will be allocated 99% to the Unitholders and 1% to the General Partner. However, if either the Unitholders or the General Partner have a capital deficit, the entire loss will be allocated to the partners with positive capital accounts. Under the terms of the Partnership Agreement, Partnership Net Cash Flow from Operations, as defined, will be distributed 99% to the Unitholders and 1% to the General Partner until such time as the Unitholders receive a cumulative preferred return of 12% per annum on their Unrecovered Capital, as defined. Thereafter, Partnership Net Cash Flow from Operations, as defined, will be distributed 85% to the Unitholders and 15% to the General Partner. At December 31, 1996, the Unitholders have not yet received their cumulative preferred return. 4. Property The Beverly Sunset Medical Building, which contains approximately 158,585 net rentable square feet of space, was acquired in 1987. The Property is located at 9201 Sunset Boulevard in the City of West Hollywood, California. The Property was approximately 72.8% and 69.6% occupied at December 31, 1996 and 1995, respectively. In January 1989, the City of West Hollywood adopted Ordinance No. 214 (the "Ordinance") which required the installation of sprinklers and other life-safety equipment in all existing high- rise buildings by January 1992. On April 20, 1992, the City of West Hollywood extended the deadline for completing the sprinkler retrofit of tenant areas to February 3, 1997. In response, the General Partner retained a building code consultant to analyze the fire/life-safety requirements applicable to the Property and to develop a plan to complete the sprinkler retrofit. The General Partner's initial plan, which was approved by the City of West Hollywood, involved performing the remaining retrofit during the course of remodeling tenant suites in connection with new leasing and renewals. Under this plan, approximately 36% of the tenant areas and 100% of all common areas were brought into compliance. The General Partner approached the City of West Hollywood to request an extension of the deadline for completion of the required sprinkler retrofit project. In November 1996, the City of West Hollywood granted such extension and advised that the Partnership has until December 7, 1998 to complete the sprinkler retrofit of the Property. The Property also contains asbestos-containing materials ("ACM") in certain areas, including the fireproofing material that covers the steel structure of the Property. Although the ACM has been determined to be non-hazardous in its current condition, the Partnership is required to abate such ACM to the extent that any ACM is at risk of being disturbed in the process of installing sprinklers or in the remodeling of tenant suites. The General Partner has retained an environmental consultant to provide project management, air quality monitoring and project close-out documentation in connection with the ACM abatement. The Partnership has no legal obligation to implement a full abatement of the entire building at present. The presence of ACM may or may not impact the future value of the Property. All tenant improvements, asbestos abatements and sprinkler retrofit costs will be funded from cash and cash equivalents and future cash flow from operations. Approximately $125,000 and $62,000 were expended on the sprinkler retrofit and asbestos abatement in 1996 and 1995, respectively, which the Partnership performed during the course of remodeling tenant suites in connection with new leasing and renewals. In addition, approximately $182,000 and $335,000 were expended for tenant improvements during 1996 and 1995, respectively. 5. Transactions With Related Parties Annual Asset Management Fee - The General Partner is entitled to an annual asset management fee equal to $50,000 per year. The unpaid asset management fees as of December 31, 1996 and 1995 aggregated $335,500 and $285,500, respectively. As provided in the Partnership Agreement, the annual asset management fee was scheduled to increase to $115,000 per annum in 1991. However, the General Partner has voluntarily waived the $65,000 increase in each year since 1991. General Partner Distribution - Cumulative cash distributions totaling $51,553, declared in prior years, were paid to the General Partner on October 15, 1996. Administrative Services - Under the terms of the Partnership Agreement, the Partnership reimburses the General Partner and its affiliates for travel expenses relating to the management of the Partnership. For the years ended December 31, 1996, 1995, and 1994, costs of such expenses incurred were $15,987, $16,024 and $11,361, respectively. At December 31, 1996 and 1995, $2,265 and $87 remained payable to the General Partner or its affiliates for these expenses. An affiliate of the General Partner paid for all travel expenses relating to the management of the Partnership from 1991 until April 1, 1994, at which time the Partnership began reimbursing the General Partner for its travel expenses. Certain cash and cash equivalents were on deposit with an affiliate of a General Partner during a portion of 1996 and all of 1995. As of December 31, 1996, no cash and cash equivalents were on deposit with an affiliate of the General Partner or the Partnership. 6. Tenant Leases The Property's leases have terms from one month to 10 years and are leased primarily to sole or small group medical practitioners. The parking facilities in the Property are leased to AMPCO Parking through September 30, 1999. The lease with AMPCO Parking requires annual minimum rent payments of $665,000 and additional rent payments contingent upon a percentage of excess gross cash receipts. The Partnership accounts for all leases as operating leases. The approximate minimum annual rental payments from existing noncancellable operating leases as of December 31, 1996 are as follows: 1997 $3,526,051 1998 3,045,720 1999 2,217,186 2000 1,297,169 2001 911,255 Thereafter 912,093 $11,909,474 7. Secured Note Payable On August 13, 1988, the Partnership obtained a $15,000,000 ten- year loan (the "Loan") from American Savings Bank (the "Bank"). The Loan is secured by the Property and an assignment of the leases. The Loan had an interest rate of 9.5% per annum for the first five years with monthly payments of interest only through September 1990. Monthly payments of $127,750 of principal and interest were required through September 1993. Thereafter, the Loan was adjusted to a new fixed rate equal to 250 basis points over the Federal Home Loan Bank's New York District Five-Year Advance Rate and combined monthly payments of principal and interest are based on a 25-year amortization schedule until maturity on August 13, 1998. Effective October 1, 1993, the Loan interest rate was reset to 7.75% per annum and monthly payments of principal and interest are $110,511. On June 12, 1992, the Bank was declared insolvent and placed in the hands of the Federal Deposit Insurance Corporation ("FDIC") as receiver. In late 1993, Colony NYRO Partners, L.P. ("Colony") purchased the Loan in an FDIC loan auction sale. Subsequently, in December 1994, Colony sold the Loan to Fremont Investment & Loan. Although the Loan provides for maintenance of a real estate tax escrow account with the lender, no amounts have been deposited with the current lender. However, the Partnership has established its own escrow account, and has remitted all real estate taxes for the period ended December 31, 1996 directly to the taxing authority. Future minimum principal payments on the Loan are as follows: 1997 $ 257,728 1998 13,644,565 $13,902,293 Based on the borrowing rates currently available to the Partnership for mortgage loans with similar terms and average maturities, the estimated fair value of the Loan approximates its carrying value. 8. Reconciliation of Financial Statement Net Loss to Federal Income Tax Net Loss The Partnership's net loss reported in the financial statements for the year ended December 31, 1996 exceeded the tax loss by $622,596. The net loss reported in the financial statements exceeded the Federal Income tax loss for the years ended December 31, 1995 and 1994 by $389,786 and $320,995, respectively. These differences result primarily from the use of different depreciation lives and methods for tax purposes than those used for financial reporting purposes. In addition, rental income is recognized when received or recorded as a receivable when payment is due for tax purposes and on a straight-line basis for financial statement purposes. The partners' capital account balance on a federal income tax basis totaled $26,999,325, $27,277,710 and $27,557,786 in 1996, 1995 and 1994, respectively. Independent Auditors' Report The Partners Beverly Hills Medical Office Partners, L.P.: We have audited the accompanying balance sheets of Beverly Hills Medical Office Partners, L.P. (a Delaware limited partnership) as of December 31, 1996 and 1995, and the related statements of operations, partners' capital (deficit), and cash flows for each of the years in the three-year 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 Beverly Hills Medical Office Partners, L.P. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts February 20, 1997 Schedule III - Real Estate and Accumulated Depreciation December 31, 1996 Beverly Sunset Office Building: Medical Building Location West Hollywood, CA Construction date 1964 Acquisition date 4-23-87 Life on which depreciation in latest income statements is computed (3) Encumbrances $13,902,293 Initial cost to Partnership: (1) Land 8,379,434 Buildings and improvements 32,803,390 Costs capitalized subsequent to acquisition: Land, buildings and improvements 9,118,423 Gross amount at which carried at close of period: Land $8,379,434 Buildings and improvements 41,921,813 50,301,247 Accumulated depreciation(2) 14,031,118 (1) The aggregate cost for Federal Income tax purposes is approximately $51,724,069. (2) The amount of accumulated depreciation for Federal income tax purposes is $12,646,084. (3) Buildings and improvements - 3 - 30 years. A reconciliation of the carrying amount of real estate and accumulated depreciation for the years ended December 31, 1996, 1995, and 1994 follows: 1996 1995 1994 Real estate investments: Beginning of year $41,623,252 $40,944,262 $40,978,362 Additions 347,155 678,990 358,973 Retirements (48,594) -- (393,073) End of year $41,921,813 $41,623,252 $40,944,262 Accumulated depreciation: Beginning of year $12,281,843 $10,527,620 $ 9,264,246 Depreciation expense 1,797,869 1,754,223 1,656,447 Retirements (48,594) -- (393,073) End of year $14,031,118 $12,281,843 $10,527,620 INDEPENDENT AUDITORS' REPORT The Partners Beverly Hills Medical Office Partners, L.P.: Under date of February 20, 1997, we reported on the balance sheets of Beverly Hills Medical Office Partners, L.P. (a Delaware limited partnership) as of December 31, 1996 and 1995, and the related statements of operations, partners' capital (deficit), and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the 1996 annual report to Unitholders. These financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Boston, Massachusetts February 20, 1997 EX-27 3 FINANCIAL DATA SCHEDULE FOR 1996 FORM 10-K BEVERLY HILLS MEDICAL OFFICE PARTNERS, L.P.
5 12-mos Dec-31-1996 Dec-31-1996 1,648,513 000 105,552 000 000 000 50,301,247 (14,031,118) 39,251,077 150,148 13,902,293 000 000 000 000 24,617,777 3,978,679 4,096,162 000 1,774,810 2,134,772 000 1,087,561 (900,981) 000 (900,981) 000 000 000 (900,981) (.16) (.16)
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