<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NO. 0-15430
_____________________________________________________________
COPLEY REALTY INCOME PARTNERS 1; A LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2893293
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 FRANKLIN STREET, 25TH FLOOR
BOSTON, MASSACHUSETTS 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(617) 261-9000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
No voting stock is held by nonaffiliates of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
Page of pages (including exhibits). Exhibit Index on Page .
------ ------ -----
<PAGE>
PART I
------
Item 1. Business.
--------
Copley Realty Income Partners 1; A Limited Partnership (the
"Partnership") was organized under the Uniform Limited Partnership Act of the
Commonwealth of Massachusetts on November 20, 1985, to invest primarily in newly
constructed and existing income-producing real properties.
The Partnership was initially capitalized with contributions of $2,000
in the aggregate from First Income Corp. (the "Managing General Partner") and
CCOP Associates Limited Partnership (the "Associate General Partner")
(collectively, the "General Partners") and $10,000 from Copley Real Estate
Advisors, Inc. (the "Initial Limited Partner"). The Partnership filed a
Registration Statement on Form S-11 (the "Registration Statement") with the
Securities and Exchange Commission on December 5, 1985, with respect to a public
offering of 40,000 units of limited partnership interest at a purchase price of
$1,000 per unit (the "Units") with an option to sell up to an additional 60,000
Units (an aggregate of $100,000,000). The Registration Statement was declared
effective on March 27, 1986.
The first sale of Units occurred on August 7, 1986, at which time the
Initial Limited Partner withdrew its contribution from the Partnership.
Investors were admitted to the Partnership thereafter at monthly closings; the
offering terminated and the last group of initial investors was admitted to the
Partnership on April 9, 1987. As of April 9, 1987, a total of 34,581 Units had
been sold, a total of 2,188 investors had been admitted as limited partners (the
"Limited Partners") and a total of $34,322,210 had been contributed to the
capital of the Partnership.
As of December 31, 1996 the Partnership owned the two real property
investments described below. In 1990, a third-party mortgage lender foreclosed
on a third real estate investment. In 1996, the Partnership sold two other real
estate investments. The principal terms of these sales are set forth in the
following table:
<TABLE>
<CAPTION>
INVESTMENT MONTH/YEAR OF SALE NET SALE PROCEEDS DISTRIBUTION/UNIT DISTRIBUTION MONTH/YEAR
<S> <C> <C> <C> <C>
Investment Four 4/96 $11,148,837 $177.00 4/96
Investment Five/1/ 8/96 $ 5,202,964 $150.00 8/96
</TABLE>
The Partnership has no current plan to renovate, improve or further develop
any of its real property. In the opinion of the Managing General Partner of the
Partnership, the properties are adequately covered by insurance.
The Partnership has no employees. Services are performed for the
Partnership by the Managing General Partner and affiliates of the Managing
General Partner.
A. Warehouse Building in Anaheim, California.
-----------------------------------------
On December 30, 1986, the Partnership acquired for $2,000,000 a 60%
interest in a joint venture formed with Davis Anaheim Distribution Center
Associates ("Davis Development") to construct a one-story warehouse building
containing approximately 106,000 square feet of space on a 4.9-acre parcel of
land in Anaheim, California. The building was 100% leased as of December 31,
1996. The joint venture agreement, as amended, entitled the Partnership to
receive a current preferred return on its capital contribution at the rate of
10% per annum and to receive an additional return at the rate of 0.5% per annum
which could be accrued and paid out of sale or refinancing proceeds if
sufficient cash flow was not currently available therefor. In addition, the
Partnership was entitled to receive 60% of all cash flow from operations,
refinancing proceeds and net sale proceeds.
- ----------
/1/ Represents net sale proceeds to the Partnership after repayment of related
mortgage loan.
<PAGE>
The Partnership contemporaneously made a non-recourse mortgage loan
commitment to the joint venture of up to $2,750,000, which was fully funded.
The loan bore interest at the rate of 11% per annum, payable (beginning January
1, 1991) in equal monthly payments of principal and interest, based on a 30-year
amortization schedule with a balloon payment at maturity in January, 1996. The
loan had a term of ten years, was not prepayable and was secured by a first
mortgage on the land and the building.
Subsequently, the Partnership increased its investment in the joint
venture by committing to make deficit loans to the venture in the maximum amount
of $477,000, of which $436,276 was funded. Davis Development committed to make
deficit loans to the joint venture in the maximum amount of $318,000, of which
$290,850 was funded. The loans bore interest at a rate equal to the prime rate
charged by Wells Fargo Bank. As of June 4, 1993, the Partnership's interest was
increased from 60% to 61.6%, since Davis Development did not match its
proportionate share of a $30,000 operating deficit incurred during the month of
May, 1993. The joint venture agreement provided for the repayment of principal
and interest on deficit loans from cash flow to the extent that such cash is
available after payment of any accrued preferential returns.
Effective January 1, 1996, the joint venture was dissolved and
ownership of the joint venture assets was assigned to the Partnership.
B. Warehouse/Service Center Buildings in Atlanta, Georgia.
------------------------------------------------------
On December 4, 1987, the Partnership acquired a 34.2% interest in a joint
venture formed with Copley Realty Income Partners 2; A Limited Partnership, an
affiliate of the Partnership (the "Affiliate") which had a 25.8% interest, and
an affiliate of Hill Properties, Inc. ("Hill"). Effective January 1, 1990, the
joint venture agreement was amended to increase the Partnership's ownership
interest in the joint venture to 38.19% and the Affiliate's interest to 28.81%.
As of September 3, 1991, as a result of Hill's inability to fund its share of
capital contributions, the Partnership and the Affiliate assumed 100% ownership
of the property with the Partnership having a 57% interest. As of December 31,
1996, the Partnership had contributed $1,932,300 to the capital of the joint
venture. The joint venture agreement, as amended, entitles the Partnership and
the Affiliate to receive a preferred return on their respective invested capital
at the rate of 10.25% per annum. The joint venture agreement also entitles the
Partnership to receive 57% of cash flow following payment of the preferred
return and 57% of the net proceeds of sales and financings following return of
the Partnership's and the Affiliate's capital contribution.
The Partnership also committed to make a loan to the joint venture in the
maximum amount of $4,622,700. On October 4, 1989, the Partnership increased its
maximum commitment to $4,964,700, of which $4,850,094 had been funded as of
December 31, 1996. The loan has a term of ten years and is secured by a first
mortgage on the land and buildings. Interest only is payable monthly at the
rate of 10.25% per annum. The loan is prepayable at any time, subject to
payment of a premium designed to give the Partnership the equivalent yield as if
the loan had been outstanding until maturity. The Affiliate also committed to
make a loan to the joint venture in the maximum amount of $3,487,300, increased
to $3,745,300 on October 4, 1989, of which $3,658,843 had been funded as of
December 31, 1996. This loan has the same terms and conditions as the loan from
the Partnership and is pari passu with the loan from the Partnership.
The Partnership and the Affiliate own approximately 14.9 acres of land in
the Medlock Oaks Business Park in Atlanta, Georgia and five service center
buildings containing 173,916 square feet of space located thereon. As of
December 31, 1996 the five buildings were 97% leased. On February 4, 1997, the
joint venture entered into a contract for sale of this investment at a price
which exceeded the carrying value.
<PAGE>
Item 2. Properties
----------
The following table sets forth the annual realty taxes for the
Partnership's properties and information regarding tenants who occupy 10% or
more of gross leasable area (GLA) in the Partnership's properties:
<TABLE>
<CAPTION>
ESTIMATED NUMBER OF
1997 TENANTS SQUARE ANNUAL LINE OF
ANNUAL WITH 10% FEET OF CONTRACT BUSINESS
REALTY OR MORE NAME(S) OF EACH RENT LEASE RENEWAL OF PRINCIPAL
PROPERTY TAXES OF GLA * TENANT(S) TENANT PER S. F. EXPIRATION OPTIONS TENANTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Warehouse Building in $42,608 3 E.B. Bradley 24,892 $4.80 7/01 None Distribution,
Anaheim, CA light assembly
Computer 28,224 $4.98 9/97 None Distribution
Transport, Inc.
Arroyo Plastics, 53,116 $5.04 12/02 None Distribution
Inc.
Warehouse/Service Center $88,464 2 Valmet-Sentrol, 22,727 $7.40 11/98 None Engineering
Bldgs in Atlanta, GA Ltd. industry
measurements &
controls
Allen-Bradley Co. 22,679 $7.27 7/98 None Industrial
automation
products
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The following table sets forth for each of the last five years the gross
leasable area, occupancy rates, rental revenue and net effective rent for the
Partnership's properties:
<TABLE>
<CAPTION>
Rental Net Effective
Gross Leasable Year-End Revenue Rent
PROPERTY Area Occupancy Recognized ($/sf/yr)*
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warehouse Building in Anaheim, CA
1992 106,232 100% $ 533,216 $5.02
1993 106,232 100% $ 420,364 $3.96
1994 106,232 100% $ 437,045 $4.11
1995 106,232 100% $ 469,666 $4.42
1996 106,232 100% $ 492,479 $4.64
Service Center Buildings in Atlanta, GA
1992 173,916 88% $1,044,485 $6.71
1993 173,916 98% $1,025,068 $6.44
1994 173,916 100% $1,087,696 $6.30
1995 173,916 95% $1,101,894 $6.63
1996 173,916 97% $1,165,073 $6.91
- -------------------------------------------------------------------------------------------------
</TABLE>
* Net Effective Rent Calculation is based on the average occupancy during the
respective year.
<PAGE>
Set forth below is a schedule of lease expirations for each of the next
ten years for the Partnership's properties based on the annual contract rent in
effect at December 31, 1996:
<TABLE>
<CAPTION>
TENANT AGING REPORT
PROPERTY # OF LEASE TOTAL TOTAL PERCENTAGE OF
EXPIRATIONS SQUARE FEET ANNUAL CONTRACT RENT GROSS ANNUAL
RENTAL*
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warehouse Building in Anaheim, CA
- ---------------------------------
1997 1 28,224 $140,556 27%
1998 0 0 $0 0%
1999 0 0 $0 0%
2000 0 0 $0 0%
2001 1 24,892 $119,484 22%
2002 1 53,116 $267,708 51%
2003 0 0 $0 0%
2004 0 0 $0 0%
2005 0 0 $0 0%
2006 0 0 $0 0%
Service Center Buildings in Atlanta, GA
- ---------------------------------------
1997 7 51,498 $379,428 31%
1998 6 70,012 $514,428 42%
1999 7 41,301 $266,520 22%
2000 1 6,073 $ 53,568 5%
2001 0 0 $0 0%
2002 0 0 $0 0%
2003 0 0 $0 0%
2004 0 0 $0 0%
2005 0 0 $0 0%
2006 0 0 $0 0%
- -------------------------------------------------------------------------------------------------------
</TABLE>
* DOES NOT INCLUDE EXPENSES PAID BY TENANTS.
<PAGE>
TENANTS.
The following table sets forth for each of the Partnership's
properties the: (i) federal tax basis, (ii) rate of depreciation, (iii) method
of depreciation, (iv) life claimed, and (v) accumulated depreciation, with
respect to each property or component thereof for purposes of depreciation:
<TABLE>
<CAPTION>
Depreciable Assets
Rate of Life Accumulated
Entity / Property Tax Basis Depreciation Method in years Depreciation
East Anaheim Distribution Center
- --------------------------------
<S> <C> <C> <C> <C> <C>
Building $ 1,785,598 5.26% SL 19 $ 949,283
Tenant Improvements 821,644 3.17% SL 31.5 217,140
----------- ----------
Total Depreciable Assets 2,607,242 1,166,423
Medlock Oaks Associates
- --------------------------------
Building $ 5,431,792 5.26% SL 19 $2,591,971
Tenant Improvements 209,361 2.56% SL 39 9,979
Tenant Improvements 3,041,330 3.17% SL 31.5 603,853
----------- ----------
Total Depreciable Assets 8,682,483 3,205,803
Total Depreciable Assets $11,289,725 $4,372,226
=========== ==========
- ----------------------------------------------------------------------------------------------
</TABLE>
SL = Straight Line Depreciation
<PAGE>
Following is information regarding the competitive market conditions for
each of the Partnership's properties. This information has been gathered from
sources deemed reliable. However, the Partnership has not independently
verified the information and, as such, cannot guarantee its accuracy or
completeness:
A. Warehouse Building in Anaheim, CA.
----------------------------------
This property is located within the Orange County industrial market,
consisting of 228 million square feet. Anaheim is a desirable industrial
location due to its close proximity to major freeways and the central portion of
Orange County. At September 30, 1996, overall vacancy was 7.8%, down from 9.3%
twelve months earlier. The property more specifically is located within the
North Orange County industrial submarket, which has an inventory of 101 million
square feet, or 44% of the total Orange County market. As of September 30,
1996, the North Orange County vacancy rate was 6.6%, down from the 8.1% vacancy
rate reported one year ago and 11% two years ago. Approximately 3.7 million
square feet of new industrial space was either under construction or had been
completed as of September 30, 1996 within the Orange County market.
B. Industrial/Service Center Buildings in Atlanta, GA.
---------------------------------------------------
This investment is located in the Metropolitan Atlanta Industrial market
which totaled 294 million square feet at September 30, 1996, an increase of more
than nine million square feet from December 31, 1995, including approximately
6.7 million square feet from speculative construction. Overall vacancy was 6%
at September 30, 1996, a slight increase from the 5.4% recorded at year end
1995. The Northeast/I-85 submarket had a total inventory of approximately 82.5
million square feet, which represents an increase of 4.3 million square feet
from year end 1995. Submarket vacancy increased during the first three quarters
of the year from 4.4% to 5.4% at September 30, 1996.
Item 3. Legal Proceedings.
-----------------
The Partnership is not a party to, nor are any of its properties
subject to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
---------------------------------------------------------------------
There is no active market for the Units. Trading in the Units is
sporadic and occurs solely through private transactions.
As of December 31, 1996, there were 2,288 holders of Units.
<PAGE>
The Partnership's Amended and Restated Agreement of Limited
Partnership dated August 7, 1986, as amended to date (the "Partnership
Agreement"), requires that any Distributable Cash (as defined therein) be
distributed quarterly to the Partners in specified proportions and priorities.
There are no restrictions on the Partnership's present or future ability to make
distributions of Distributable Cash. For the year ended December 31, 1996, cash
distributions paid in 1996, or distributed after year end with respect to 1996,
to the Limited Partners as a group totaled $12,452,964, including $11,307,987
($327 per limited partnership unit) representing proceeds from the sales of two
properties. For the year ended December 31, 1995, cash distributions paid in
1995, or distributed after year end with respect to 1995, to the Limited
Partners as a group totaled $2,161,312.
Largely due to the capital distributions mentioned above, total cash
distributions exceeded net income in 1996, and reduced partners' capital
accordingly. Regular cash distributions from operations, however, were less
than cash provided by operations. Reference is made to the Partnership's
Statement of Changes in Partners' Capital (Deficit) and Statement of Cash Flows
in Item 8 hereof.
<PAGE>
Item 6. Selected Financial Data.
-----------------------
<TABLE>
<CAPTION>
For Year For Year For Year For Year For Year
Ended or Ended or Ended or Ended or Ended or
As of: As of: As of: As of: As of:
12/31/96 (2) 12/31/95 12/31/94 12/31/93 12/31/92
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $1,689,421 $ 2,864,780 $3,064,367 $ 2,979,336 $ 3,042,933
Net Income (Loss) (1) $1,709,735 $ (983,224) $1,531,224 $ 1,679,020 $ 1,711,107
Net Income (Loss)
per Limited
Partnership Unit $ 48.95 $ (28.15) $ 43.84 $ 48.07 $ 48.99
Total Assets $9,853,360 $24,886,471 $28,270,811 $29,253,029 $29,969,921
Mortgage Loan $ 0 $ 4,238,857 $ 4,363,307 $ 4,474,343 $ 4,574,853
Total Cash
Distributions
per Limited
Partnership Unit,
including amounts
distributed after
year end with
respect to the
previous year $ 360.11 $ 62.50 $ 70.00 $ 66.25 $ 65.00
---------- ----------- ----------- ----------- -----------
</TABLE>
/(1)/ Net Income (Loss) includes charges of $250,000, $2,600,000 and $200,000 in
1996, 1995 and 1994, respectively, related to impairment of the carrying
values of certain investments.
/(2)/ Net Income includes gains totaling $906,542 on the sales of properties.
Cash distributions include returns of capital totaling $327.00 per Limited
Partnership Unit.
<PAGE>
ITEM 7.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS
- ----------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Partnership completed its offering of units of limited partnership
interest in April 1987, and a total of 34,581 units were sold. The Partnership
received proceeds of $30,812,718, net of selling commissions and other offering
costs, which have been invested in real estate, used to pay related acquisition
costs or retained as working capital reserves.
On April 9, 1996, the Partnership sold the Zehntel property for
$11,449,612, of which $4,215,073 was used to pay off the related mortgage loan
and $506,687 was used to complete certain improvements. Net proceeds to the
Partnership, after closing costs, was $11,148,837. A disposition fee of
$343,488 was accrued but not paid to the advisor. On April 25, 1996, the
Partnership made a capital distribution of $6,120,837 ($177 per limited
partnership unit), which reduced the adjusted capital contribution to $823 per
unit.
On August 13, 1996, the United Exposition property was sold for
$5,372,500. The Partnership received net proceeds of $5,202,964, after closing
costs. A disposition fee of $161,175 was accrued but not paid to the advisor.
On August 29, 1996, the Partnership made a capital distribution of $5,187,150
($150 per limited partnership unit), which reduced the adjusted capital
contribution to $673 per unit.
At December 31, 1996, the Partnership had $1,465,082 in cash and cash
equivalents and short-term investments, of which $235,081 was used for cash
distributions to partners on January 30, 1997; the remainder is being retained
for working capital reserves. The source of future liquidity and cash
distributions to partners will be cash generated by the Partnership's real
estate and short-term investments. Distributions of cash from operations
relating to the first quarter of 1995 were made at an annualized rate of 7.0% on
a capital contribution of $1,000 per unit. Distributions of cash from
operations for the remaining three quarters of 1995 were made at an annualized
rate of 6.0%. The distribution rate was decreased due to the restructuring and
extension of a lease at the Zehntel property, as discussed below. Distributions
of cash from operations were made at an annualized rate of 4.0% for all four
quarters of 1996; the second and third quarter distribution rates were based on
the weighted average adjusted capital contribution. The distribution rate was
decreased to 4.0% in 1996, in line with the cash flow decreases resulting from
the sale of the Zehntel and United Exposition investments.
The carrying value of real estate investments in the financial statements
at December 31, 1996 is at depreciated cost, or if the investment's carrying
value is determined not to be recoverable through expected undiscounted future
cash flows, the carrying value is reduced to estimated fair market value. The
fair market value of such investments is further reduced by the estimated costs
of sale for properties held for sale. Carrying value may be greater or less
than current appraised value. At December 31, 1996, the aggregate appraised
value of the Partnership's investments was approximately $800,000 greater than
their aggregate carrying value. The current appraised value of real estate
investments has been determined by the Managing General Partner and is generally
based on a combination of traditional appraisal approaches performed by the
Partnership's advisor and independent appraisers. Because of the subjectivity
inherent in the valuation process, the current appraised value may differ
significantly from that which could be realized if the real estate were actually
offered for sale in the marketplace.
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Form of Real Estate Investments
The Medlock Oaks investment is structured as a joint venture with an
affiliate of the Partnership. The Anaheim investment was structured as a joint
venture with a real estate management/development firm. Effective January 1,
1996, however, the venture was dissolved and all of its assets and liabilities
were transferred to the Partnership, whereby the property became wholly-owned by
the Partnership. The Zehntel and United Exposition investments, which were sold
in April and August of 1996, respectively, were wholly-owned properties.
Operating Factors
The Zehntel property, which is comprised of two R&D buildings, was fully
leased to a single tenant through June, 1996. During the third quarter of 1995,
the Partnership signed a lease extension with the lessee for one of the
buildings through December, 2000. The extension was retroactive to April 1,
1995, and was at a lower rental rate than under the previous lease. In the
third quarter of 1995, the tenant sub-leased the second building to a sub-tenant
which executed a primary lease for the building through June 2002. During the
third quarter of 1995, after deciding to market the Zehntel property for sale,
the Managing General Partner determined that the Partnership would not likely
recover its carrying value over the shortened investment period. Accordingly,
the Partnership reduced the carrying value to its estimated net fair market
value, less selling costs, with a charge to operations of $2,200,000. The
carrying value was further reduced by $400,000 in the fourth quarter of 1995,
with the refinement of the estimate based on the terms of the sale transaction
discussed above. The Partnership recognized a gain of $21,483 ($.62 per limited
partnership unit) upon final settlement of the sale transaction.
The United Exposition property also consists of two buildings which have
been 100% leased to one tenant since 1987. The Partnership recognized a gain of
$885,059 ($25.34 per limited partnership unit) on the sale.
At Medlock Oaks, occupancy was 97%, 95% and 100% at December 31, 1996,
1995 and 1994, respectively. The Managing General Partner determined in 1994
that the carrying value of this investment would likely not be recoverable, and
reduced the carrying value to estimated net realizable value with a charge to
operations of $200,000. In the first quarter of 1996, the Managing General
Partner determined that the Partnership would be unable to recover the carrying
value of this investment and, accordingly, the carrying value was reduced by
$250,000 through a charge to operations. The property is now under contract for
sale, which is expected to close in the second quarter of 1997. The selling
price will exceed the carrying value of the investment.
Occupancy at the Anaheim Distribution Center property was 100% at December
31, 1996, 1995 and 1994. One lease expires during 1997, representing 27% of the
space.
Two tenants each contributed more than 10% of the total rental revenue
from the Partnership's investments (collectively 55%) in 1996. These tenants
were occupants of the properties sold during 1996.
Investment Results
1996 Compared to 1995
Exclusive of the valuation allowances related to Medlock Oaks in 1996 and
Zehntel in 1995, aggregate operating results from real estate investments were
$1,176,591 in 1996 and $1,870,411 in 1995. The Zehntel and United Exposition
properties were owned for only a portion of 1996, which resulted in a decrease
in operating income of $784,000. Operating income from Anaheim Distribution
Center increased
<PAGE>
by $46,000 between 1996 and 1995 primarily due to rental increases and lower
depreciation charges. Operating income from Medlock Oaks also increased by
$40,000 due to rental increases.
Interest on cash equivalents and short-term investments decreased by
$3,000 in 1996 as compared to 1995, primarily due to lower invested balances as
well as lower short-term yields.
Cash flow provided by operating activities decreased by $1,103,000 between
1996 and 1995. This change was primarily caused by the Zehntel and United
Exposition sales, including the payment of $77,000 for lease commissions at
Zehntel, and the payment of $207,000 held by the Partnership as various
deposits. These decreases were partially offset by an increase in cash flow
from Medlock Oaks and by changes in working capital items.
1995 Compared to 1994
Exclusive of the valuation allowances related to Zehntel in 1995 and
Medlock Oaks in 1994, operating results from real estate investments were
$1,870,411 in 1995 and $2,031,065 in 1994. The decrease primarily stems from
reduced rental income after the lease restructuring at Zehntel. Operating
results also declined by $30,000 at Medlock Oaks due to lower average occupancy,
as well as the write-off of tenant improvements. These decreases were partially
offset by a $68,000 improvement in operating results at Anaheim due to increased
rentals and a decrease in amortization of tenant improvements.
Interest on cash equivalents and short-term investments increased by
$36,000 in 1995 as compared to 1994, primarily as a result of an increase in
short-term yields and higher average invested balances.
Cash flow from operations decreased by $295,000 in 1995 compared to 1994,
consistent with the change in operating results before the investment valuation
allowances.
Portfolio Expenses
General and administrative expenses primarily consist of real estate
appraisal, legal, accounting, printing and servicing agent fees. These expenses
decreased approximately $32,000 or 22%, in 1996 as compared to 1995, primarily
due to a decrease in legal and professional fees. General and administrative
expenses increased $16,000 or 12% between 1994 and 1995, primarily due to
increased professional fees. The Partnership management fee is 9% of
distributable cash flow from operations after any increase or decrease in
working capital reserves as determined by the Managing General Partner.
Management fees decreased in both 1996 and 1995 compared to the respective prior
years due to the decreases in distributable cash flow.
INFLATION
- ---------
By their nature, real estate investments tend not to be adversely affected
by inflation. Inflation may tend to result in appreciation in the value of the
Partnership's real estate investments over time, if rental rates and replacement
costs increase. Declines in real property values during the period of
Partnership operations, due to market and economic conditions, have overshadowed
the overall positive effect inflation may have on the value of the Partnership's
investments.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
See the Financial Statements of the Partnership included as a part of
this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
--------------------
The Partnership has had no disagreements with its accountants on any
matters of accounting principles or practices or financial statement
disclosure.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
(a) and (b) Identification of Directors and Executive Officers.
--------------------------------------------------------------
The following table sets forth the names of the directors and
executive officers of the Managing General Partner and the age and position held
by each of them as of December 31, 1996.
<TABLE>
<CAPTION>
Name Position(s) with the Managing General Partner Age
- ---- --------------------------------------------- ---
<S> <C> <C>
Joseph W. O'Connor President, Chief Executive Officer and Director 50
Daniel J. Coughlin Managing Director and Director 44
Peter P. Twining (1) Managing Director, General Counsel and Director 50
Wesley M. Gardiner, Jr. Vice President 38
Daniel C. Mackowiak Principal Financial and Accounting Officer 45
James J. Finnegan (2) Managing Director, General Counsel and Director 36
</TABLE>
(1) Through January 24, 1997 only
(2) As of January 25, 1997
Mr. O'Connor and Mr. Coughlin have served in an executive capacity
since the organization of the Managing General Partner on November 14, 1985.
Mr. Gardiner and Mr. Twining have served in their capacities since June 1994,
and Mr. Mackowiak has served in his capacity since January 1, 1996. All of
these individuals will continue to serve in such capacities until their
successors are elected and qualify.
(c) Identification of Certain Significant Employees.
-----------------------------------------------
None.
(d) Family Relationships.
--------------------
None.
(e) Business Experience.
-------------------
<PAGE>
The Managing General Partner was incorporated in Massachusetts on
November 14, 1985. The background and experience of the executive officers and
directors of the Managing General Partner are as follows:
Joseph W. O'Connor has been President, Chief Executive Officer and a
Director of AEW Real Estate Advisors, Inc. ("AEW"), formerly known as Copley
Real Estate Advisors, Inc., since January, 1982. He was a Principal of AEW from
1985 to 1987 and has been a Managing Director of AEW since January 1, 1988. He
has been active in real estate for 28 years. From June, 1967, until December,
1981, he was employed by New England Mutual Life Insurance Company ("The New
England"), which has been merged with and into Metropolitan Life Insurance
Company, most recently as a Vice President in which position he was responsible
for The New England's real estate portfolio. He received a B.A. from Holy Cross
College and an M.B.A. from Harvard Business School.
Daniel J. Coughlin was a Principal of AEW from 1985 to 1987 and has
been a Managing Director of AEW since January 1, 1988 and a Director of AEW
since July 1994. Mr. Coughlin has been active in financial management and
control for 22 years. From June, 1974 to December, 1981, he was a Real Estate
Administration Officer in the Investment Real Estate Department at The New
England. Since January, 1982, he has been in charge of the asset management
division of AEW. Mr. Coughlin is a Certified Property Manager and a licensed
real estate broker. He received a B.A. from Stonehill College and an M.B.A.
from Boston University.
Peter P. Twining was a Managing Director and General Counsel of AEW
until January 24, 1997 when he resigned from all offices and directorships. As
such, he was responsible for general legal oversight and policy with respect to
AEW and its investment portfolios. Before being promoted to this position in
January 1994, he was a Vice President/Principal and senior lawyer responsible
for assisting in the oversight and management of AEW's legal operations. Before
joining AEW in 1987, he was a senior member of the Law Department at The New
England and was associated with the Boston law firm, Ropes and Gray. Mr.
Twining is a graduate of Harvard College and received his J.D. in 1979 from
Northeastern University.
Wesley M. Gardiner, Jr. joined AEW in 1990 and has been a Vice
President at AEW since January, 1994. From 1982 to 1990, he was employed by
Metric Realty, a nationally-known real estate investment advisor and syndication
firm, as a portfolio manager responsible for several public and private limited
partnerships. His career at AEW has included asset management responsibility
for the company's Georgia and Texas holdings. Presently, as a Vice President
and Team Leader, Mr. Gardiner has overall responsibility for all the
partnerships advised by AEW whose securities are registered under the Securities
and Exchange Act of 1934. He received a B.A. in Economics from the University
of California at San Diego.
Daniel C. Mackowiak has been a Vice President of AEW since January 1989
and has been a Vice President and the Principal Financial and Accounting Officer
of the Managing General Partner since January 1996. Mr. Mackowiak previously
held the offices of Chief Accounting Officer of AEW from January 1989 through
April 1994 and Vice President and Principal Financial and Accounting Officer of
the Managing General Partner between January 1989 and May 1994. From 1975 until
joining AEW, he was employed by the public accounting firm of Price Waterhouse,
most recently as a Senior Audit Manager. He is a certified public accountant
and has been active in the field of accounting his entire business career. He
received a B.S. from Nichols College and an M.B.A. from Cornell University.
<PAGE>
James J. Finnegan is the Assistant General Counsel of AEW Capital
Management, L.P. ("AEW Capital Management") and has succeeded Peter Twining as
Managing Director, General Counsel and Director of AEW, a subsidiary of AEW
Capital Management. Mr. Finnegan served as Vice President and Assistant General
Counsel of Aldrich, Eastman & Waltch, L.P., a predecessor to AEW Capital
Management. Mr. Finnegan has over ten years of experience in real estate law,
including seven years of experience in private practice with major New York City
and Boston law firms. Mr. Finnegan also serves as the firm's securities and
regulatory compliance officer. Mr. Finnegan is a graduate of the University of
Vermont (B.A.) and Fordham University School of Law (J.D.).
Mr. O'Connor is a director of Evans Withycombe Residential, Inc., a
Maryland corporation organized as a real estate investment trust which is listed
for trading on the New York Stock Exchange. None of the other directors of the
Managing General Partner is a director of a company with a class of securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934. All
of the directors and officers of the Managing General Partner also serve as
directors and officers of one or more corporations which serve as general
partners of publicly-traded real estate limited partnerships which are
affiliated with the Managing General Partner.
(f) Involvement in Certain Legal Proceedings.
----------------------------------------
None.
Item 11. Executive Compensation.
----------------------
Under the Partnership Agreement, the General Partners and their
affiliates are entitled to receive various fees, commissions, cash
distributions, allocations of taxable income or loss and expense reimbursements
from the Partnership. See Notes 1, 2 and 6 of Notes to the Financial
Statements.
The following table sets forth the amounts of the fees and cash
distributions and reimbursements of out-of-pocket expenses which the Partnership
paid to or accrued for the account of the General Partners and their affiliates
for the year ended December 31, 1996. Cash distributions to General Partners
include amounts distributed after year end with respect to 1996.
<TABLE>
<CAPTION>
Amount of Compensation
Receiving Entity Type of Compensation and Reimbursement
- ---------------- -------------------- -----------------
<S> <C> <C>
AEW Real Estate Advisors, Inc. Disposition Fees, Management Fees,
(formerly known as Copley Real and Reimbursement of Expenses
Estate Advisors, Inc.) $ 635,046
General Partners Share of Distributable Cash 11,565
New England Securities Servicing Fees and
Corporation Reimbursement of Expenses 3,541
------------
TOTAL $ 650,152
============
</TABLE>
<PAGE>
For the year ended December 31, 1996, the Partnership allocated
$10,948 of taxable income to the General Partners. See Note 1 of Notes to
Financial Statements for additional information about transactions between the
Partnership and the General Partners and their affiliates.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
-----------------------------------------------
No person or group is known by the Partnership to be the beneficial
owner of more than 5% of the outstanding Units at December 31, 1996. Under the
Partnership Agreement, the voting rights of the Limited Partners are limited
and, in some circumstances, are subject to the prior receipt of certain opinions
of counsel or judicial decisions.
Except as expressly provided in the Partnership Agreement, the right
to manage the business of the Partnership is vested exclusively in the Managing
General Partner.
(b) Security Ownership of Management.
--------------------------------
The General Partners of the Partnership owned no Units at December
31, 1996.
(c) Changes in Control.
------------------
There exists no arrangement known to the Partnership, the operation
of which may at a subsequent date result in a change in control of the
Partnership.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
The Partnership has no relationships or transactions to report other
than as reported in Item 11, above.
PART IV
-------
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K.
-------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements--The Financial Statements listed on the
accompanying Index to Financial Statements and Schedule and Financial Statements
Index No. 2 are filed as part of this Annual Report.
(2) Financial Statement Schedule--The Financial Statement Schedule
listed on the accompanying Index to Financial Statements and Schedule is filed
as part of this Annual Report.
(3) Exhibits--The Exhibits listed in the accompanying Exhibit
Index are filed as a part of this Annual Report and incorporated in this Annual
Report as set forth in said Index.
(b) Reports on Form 8-K. During the last quarter of the year ended
December 31, 1996, the Partnership filed no Current Report on Form 8-K.
<PAGE>
COPLEY REALTY INCOME PARTNERS 1;
A LIMITED PARTNERSHIP
Financial Statements
* * * * * * *
December 31, 1996
<PAGE>
COPLEY REALTY INCOME PARTNERS 1;
A LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page #
Report of Independent
Accountants...............................................................
Financial Statements:
Balance Sheet - December 31, 1996 and 1995........................
Statement of Operations - For the Years Ended December 31, 1996,
1995 and 1994...................................................
Statement of Changes in Partners' Capital (Deficit) -
For the Years Ended December 31, 1996, 1995 and 1994..............
Statement of Cash Flows - For the Years Ended December 31, 1996,
1995 and 1994...................................................
Notes to Financial Statements...................................
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation at
December 31, 1996...............................................
<PAGE>
Report of Independent Accountants
---------------------------------
To the Partners
COPLEY REALTY INCOME PARTNERS 1;
A LIMITED PARTNERSHIP
In our opinion, based upon our audits and the reports of other auditors, for the
years ended December 31, 1996, 1995 and 1994, the financial statements listed in
the accompanying index present fairly, in all material respects, the financial
position of Copley Realty Income Partners 1; A Limited Partnership (the
"Partnership") at December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of First Income Corp., the Managing
General Partner of the Partnership; our responsibility is to express an opinion
on these financial statements based on our audits. We did not audit the
financial statements of the Partnership's Medlock Oaks joint venture investee
for the years ended December 31, 1996, 1995 and 1994, which results of
operations are recorded using the equity method of accounting in the
Partnership's financial statements. Equity in joint venture income for this
joint venture investee was $280,509, $240,331 and $270,638 for the years ended
December 31, 1996, 1995 and 1994, respectively. We also did not audit the
financial statements of the Partnership's investment in Anaheim Distribution
Center for the years ended December 31, 1996, 1995 and 1994. Operating income
for this investment totalled $410,656 for the year ended December 31, 1996, and
equity in joint venture income was $250,312 and $182,243 for the years ended
December 31, 1995 and 1994. Those statements were audited by other auditors
whose reports thereon have been furnished to us, and our opinion expressed
herein, insofar as it relates to the amounts included for the equity in joint
venture income for Medlock Oaks for the years ended December 31, 1996, 1995 and
1994, and for the operating income and the equity in joint venture income for
Anaheim Distribution Center for the years ended December 31, 1996, 1995 and
1994, is based solely on the reports of the other auditors. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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 accounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by the Managing
General Partner, and evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors for the years ended
December 31, 1996, 1995 and 1994 provide a reasonable basis for the opinion
expressed above.
As discussed in Note 2 to the financial statements, the Partnership changed its
method of accounting for impaired long-lived assets and for long-lived assets to
be disposed of effective January 1, 1995 in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of".
/s/ Price Waterhouse LLP
- -------------------------
Boston, Massachusetts
March 26, 1997
<PAGE>
COPLEY REALTY INCOME PARTNERS 1;
A LIMITED PARTNERSHIP
BALANCE SHEET
December 31,
------------------------
1996 1995
---------- -----------
ASSETS
Real estate investments:
Property, net $3,684,199 $13,441,466
Joint ventures 4,704,079 8,971,192
---------- -----------
8,388,278 22,412,658
Cash and cash equivalents 1,166,590 449,092
Short-term investments 298,492 1,465,991
Deferred rent receivable - 558,730
---------- -----------
$9,853,360 $24,886,471
========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage loan $ - $ 4,238,857
Accounts payable 49,902 276,581
Accrued management fee 23,250 51,820
Deferred disposition fee 504,663 -
---------- -----------
Total liabilities 577,815 4,567,258
---------- -----------
Partners' capital (deficit):
Limited partners ($673 and $1,000 per
unit, respectively; 100,000 units authorized,
34,581 units issued and outstanding) 9,375,845 20,422,156
General partners (100,300) (102,943)
---------- -----------
Total partners' capital 9,275,545 20,319,213
---------- -----------
$9,853,360 $24,886,471
========== ===========
(See accompanying notes to financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 1;
A LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
INVESTMENT ACTIVITY
Property rentals $1,302,434 $ 2,264,643 $2,538,256
Property operating expenses (84,876) - -
Depreciation and amortization (206,677) (423,712) (493,677)
Interest and other expenses (114,799) (461,163) (466,395)
---------- ----------- ----------
896,082 1,379,768 1,578,184
Joint venture earnings 280,509 490,643 452,881
Investment valuation allowances (250,000) (2,600,000) (200,000)
---------- ----------- ----------
Total real estate operations 926,591 (729,589) 1,831,065
Gain on sales of property 906,542 - -
---------- ----------- ----------
Total real estate activity 1,833,133 (729,589) 1,831,065
Interest on cash equivalents
and short-term investments 106,478 109,494 73,230
---------- ----------- ----------
Total investment activity 1,939,611 (620,095) 1,904,295
---------- ----------- ----------
PORTFOLIO EXPENSES
Management fee 114,383 215,915 241,825
General and administrative 115,493 147,214 131,246
---------- ----------- ----------
229,876 363,129 373,071
---------- ----------- ----------
NET INCOME (LOSS) $1,709,735 $ (983,224) $1,531,224
========== =========== ==========
Net income (loss) per limited partnership unit $ 48.95 $ (28.15) $ 43.84
========== =========== ==========
Cash distributions per limited
partnership unit $ 368.38 $ 65.00 $ 70.00
========== =========== ==========
Number of limited partnership units
outstanding during the year 34,581 34,581 34,581
========== =========== ==========
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 1;
A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------
1996 1995 1994
------------------------- ----------------------- -----------------------
General Limited General Limited General Limited
Partners Partners Partners Partners Partners Partners
---------- ------------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $(102,943) $ 20,422,156 $ (70,405) $23,643,312 $(61,266) $24,548,070
Cash distributions (14,454) (12,738,949) (22,706) (2,247,764) (24,451) (2,420,670)
Net income (loss) 17,097 1,692,638 (9,832) (973,392) 15,312 1,515,912
--------- ------------ --------- ----------- -------- -----------
Balance at end of year $(100,300) $ 9,375,845 $(102,943) $20,422,156 $(70,405) $23,643,312
========= ============ ========= =========== ======== ===========
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 1;
A LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,709,735 $ (983,224) $ 1,531,224
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 206,677 423,712 493,677
Investment valuation allowances 250,000 2,600,000 200,000
Equity in joint venture net income (280,509) (490,643) (452,881)
Cash distributions from joint
ventures 575,189 813,600 691,428
Gain on sales of property (906,542) - -
Deferred leasing commissions (144,245) (168,853) -
Decrease (increase) in investment income
receivable 19,420 (17,841) 1,203
Increase (decrease) in operating liabilities (255,249) (6,197) 42,715
Decrease in property working capital 56,344 163,231 121,516
------------ ----------- -----------
Net cash provided by operating activities 1,230,820 2,333,785 2,628,882
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sales of property 15,847,138 - -
Deferred disposition fees 504,663 - -
Investment in property (1,020,942) - (10,567)
Repayment of loan by joint venture - 20,878 17,192
Decrease (increase) in short-term
investments, net 1,148,079 (1,148,945) 348,256
------------ ----------- -----------
Net cash provided by (used in)
investing activities 16,478,938 (1,128,067) 354,881
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgage loan (4,238,857) (124,450) (111,036)
Distributions to partners (12,753,403) (2,270,470) (2,445,121)
------------ ----------- -----------
Net cash used in financing activities (16,992,260) (2,394,920) (2,556,157)
------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents 717,498 (1,189,202) 427,606
Cash and cash equivalents:
Beginning of year 449,092 1,638,294 1,210,688
------------ ----------- -----------
End of year $ 1,166,590 $ 449,092 $ 1,638,294
============ =========== ===========
</TABLE>
Non-cash transaction:
<PAGE>
Effective January 1, 1996, the Partnership's joint venture investment in East
Anaheim Distribution Center Associates was converted to a wholly-owned property.
The carrying value of this investment at conversion was $3,763,820.
(See accompanying notes to financial statements)
<PAGE>
COPLEY REALTY INCOME PARTNERS 1;
A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
- ----------------------------------
General
- -------
Copley Realty Income Partners 1; A Limited Partnership (the
"Partnership") is a Massachusetts limited partnership organized for the purpose
of investing primarily in newly-constructed and existing income-producing real
properties. The Partnership commenced operations in August 1986, and acquired
the two real estate investments it currently owns prior to the end of 1987. The
Partnership intended to dispose of its investments within nine years of their
acquisition, and then liquidate; however, the Managing General Partner expects
to extend the investment period at least into 1998, having determined it to be
in the best interest of the limited partners.
The Managing General Partner of the Partnership is First Income Corp.,
a wholly-owned subsidiary of AEW Real Estate Advisors, Inc. ("AEW"), formerly
known as Copley Real Estate Advisors, Inc. ("Copley"). The associate general
partner is CCOP Associates Limited Partnership, a Massachusetts limited
partnership, the general partners of which are managing directors of AEW and/or
officers of the Managing General Partner. Subject to the Managing General
Partner's overall authority, the business of the Partnership is managed by AEW
pursuant to an advisory contract.
On December 10, 1996, Copley's parent, New England Investment
Companies, Limited Partnership ("NEIC"), a publicly traded master limited
partnership, acquired certain assets subject to then existing liabilities from
Aldrich, Eastman & Waltch, Inc. and its affiliates and principals (collectively
"the AEW Operations"). Simultaneously, a new entity, AEW Capital Management
L.P. was formed, into which NEIC contributed its interests in Copley and its
affiliates. As a result, the AEW Operations were combined with Copley to form
the business operations of AEW Capital Management, L.P. This transaction is not
expected to have a material effect on the operations of the Partnership.
Prior to August 30, 1996, New England Mutual Life Insurance Company
("The New England") was NEIC's principal unit holder and owner of all the
outstanding stock of NEIC's general partner. On August 30, 1996, The New
England merged with and into Metropolitan Life Insurance Company ("Met Life").
Met Life is the surviving entity and, therefore, through a wholly-owned
subsidiary, became the owner of the units of partnership interest previously
owned by The New England and of the stock of NEIC's general partner. This
transaction is not expected to have a material effect on the operations of the
Partnership.
Management
- ----------
AEW, as advisor, is entitled to receive stipulated fees from the
Partnership in consideration of services performed in connection with the
management of the Partnership and acquisition and disposition of Partnership
investments in real property. Partnership management fees are 9% of
distributable cash flow from operations, as defined, before deducting such fees.
AEW is also reimbursed for expenses incurred in connection with administering
the Partnership ($16,000 in 1996, $17,746 in 1995, and $6,270 in 1994).
Acquisition fees were based on 3% of the gross proceeds from the offering
available for investment and paid at the time commitments were initially funded.
Disposition fees are generally 3% of the selling price of property, but are
subject to the prior receipt by the limited partners of their capital
contributions plus a stipulated return thereon.
New England Securities Corporation, an indirect subsidiary of Met
Life, is engaged by the Partnership to act as its unit holder servicing agent.
Fees and out-of-pocket expenses for such services totaled $3,541, $3,193 and
$4,468 in 1996, 1995 and 1994, respectively.
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Managing General Partner to make
estimates affecting the reported amounts of assets and liabilities, and of
revenues and expenses. In the Partnership's business, certain estimates require
an assessment of factors not within management's control, such as the ability of
tenants to perform under long-term leases and the ability of the properties to
sustain their occupancies in changing markets. Actual results, therefore, could
differ from those estimates.
Real Estate Joint Ventures
- --------------------------
Investments in joint ventures, including loans made to joint ventures,
which are in substance real estate investments, are stated at cost plus (minus)
equity in undistributed joint venture income (losses). Allocations of joint
venture income (losses) were made to the Partnership's venture partners as long
as they had substantial economic equity in the project. Economic equity is
measured by the excess of the appraised value of the property over the
Partnership's total cash investment plus accrued preferential returns and
interest thereon. For its one remaining joint venture investment, the
Partnership records its ownership share of the operating results, after the
elimination of all inter-entity transactions, since its venture partner, an
affiliate of the Partnership, has substantial economic equity in the project.
Joint ventures are consolidated with the accounts of the Partnership if, and
when, the venture partner no longer shares in the control of the business.
Property
- --------
Property includes land and buildings and improvements, which are
stated at cost less accumulated depreciation, plus other operating net assets.
The Partnership's initial carrying value of a property previously owned by a
joint venture equals the Partnership's carrying value of the predecessor
investment on the conversion date.
Capitalized Costs, Depreciation and Amortization
- ------------------------------------------------
Maintenance and repair costs are expensed as incurred; significant
improvements and renewals are capitalized. Depreciation is computed using the
straight-line method based on the estimated useful lives of the buildings and
improvements. Leasing costs are also capitalized and amortized over the related
lease terms.
Acquisition fees have been capitalized as part of the cost of real
estate investments. Amounts not related to land are being amortized using the
straight-line method over the estimated useful lives of the underlying real
property.
Realizability of Real Estate Investments
- ----------------------------------------
The Partnership considers a real estate investment to be impaired when
it determines the carrying value of the investment is not recoverable through
expected undiscounted cash flows from the operations and disposition of the
property. The impairment loss is based on the excess of the investment's
carrying value over its estimated fair market value. For investments being held
for sale, the impairment loss also includes estimated costs of sale. Property
held for sale is not depreciated during the holding period. Prior to the
adoption of Statement of Financial Accounting Standards No. 121 as of January 1,
1995, the reduction in the investment carrying value was to estimated net
realizable value.
The carrying value of an investment may be more or less than its
current appraised value. At December 31, 1996, the aggregate appraised value of
the Partnership's investments was approximately $800,000 greater than their
carrying value after giving effect to previously recorded valuation allowances.
At December 31, 1995, the appraised value of one of the Partnership's
investments exceeded its related carrying value by $1,400,000. The carrying
values of the remaining investments approximated their related appraised values.
The current appraised value of real estate investments has been
estimated by the Managing General Partner and is generally based on a
combination of traditional appraisal approaches performed by the Partnership's
advisor and independent appraisers. Because of the subjectivity inherent in the
valuation
<PAGE>
process, the current appraised value may differ significantly from
that which could be realized if the real estate were actually offered for sale
in the marketplace.
Cash Equivalents and Short-Term Investments
- -------------------------------------------
Cash equivalents are stated at cost, plus accrued interest. The
Partnership considers all highly liquid debt instruments purchased with a
maturity of ninety days or less to be cash equivalents; otherwise, they are
classified as short-term investments.
The Partnership has the positive intent and ability to hold all short-
term investments to maturity; therefore, short-term investments are carried at
cost plus accrued interest, which approximates market value. At December 31,
1996 and 1995, all investments are in commercial paper with less than two months
and five months, respectively, remaining to maturity.
Deferred Disposition Fees
- -------------------------
According to the terms of the advisory contract, AEW is entitled to
disposition fees related to sales of real estate investments. Payment of the
fees, however, is contingent upon the limited partners first receiving their
capital, plus a stipulated return thereon. Since inception, the Partnership has
sold two investments and has accrued disposition fees totaling $504,663 through
December 31, 1996.
Income Taxes
- ------------
A partnership is not liable for income taxes and, therefore, no
provision for income taxes is made in the financial statements of the
Partnership. A proportionate share of the Partnership's income is reportable on
each partner's tax return.
Per Unit Computations
- ---------------------
Per unit computations are based on the number of units of limited
partnership interest outstanding during the year. The actual per unit amount
will vary by partner depending on the date of admission to, or withdrawal from,
the Partnership.
NOTE 3 - INVESTMENT IN PROPERTY
- -------------------------------
The following is a summary of the Partnership's investment in
property:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- ------------
<S> <C> <C>
Land $1,279,147 $ 7,973,584
Buildings and improvements 2,482,904 12,085,214
Investment valuation allowance - (2,600,000)
Other net assets 5,819 156,818
Accumulated depreciation (83,671) (4,174,150)
---------- -----------
Net carrying value $3,684,199 $13,441,466
========== ===========
</TABLE>
The net carrying value at December 31, 1996 relates solely to Anaheim
Distribution Center. The net carrying value at December 31, 1995 was comprised
of the Zehntel and United Exposition properties at $9,533,690 and $3,907,776,
respectively.
The buildings and improvements of Anaheim Distribution Center are
being depreciated over 30 years, beginning January 1, 1996.
<PAGE>
Anaheim Distribution Center
- ---------------------------
On December 30, 1986, the Partnership entered into a joint venture
with an affiliate of Davis Development to construct and operate an industrial
facility located in Anaheim, California. The Partnership invested $5,216,276 in
the joint venture in the form of capital contributions and loans. Effective
January 1, 1996, the joint venture was dissolved and ownership of the venture's
net assets was assigned to the Partnership. Accordingly, as of this date, the
investment is being accounted for as a wholly-owned property. The carrying
value of the joint venture investment at conversion ($3,763,820) was allocated
to land, building and improvements, and other net operating assets.
The aggregate minimum rents under non-cancelable leases are as
follows: 1997-$487,000; 1998-$394,000; 1999-$406,000; 2000-$419,000; 2001-
$381,000; thereafter-$318,000.
Zehntel
- -------
On September 11, 1986, the Partnership acquired two one-story research
and development buildings and land located in Walnut Creek, California, subject
to a first mortgage loan. The property was listed for sale during the third
quarter of 1995, and the indication from the market was that the Partnership
would likely not recover its net carrying value over the shortened investment
period. Accordingly, the Partnership recognized an investment valuation
allowance of $2,200,000 through a charge to operations. The carrying value was
further reduced by $400,000 in the fourth quarter of 1995, with the refinement
of the fair market value estimate based on the terms of the pending sale
transaction. The property was sold on April 9, 1996 for $11,449,612, of which
$4,215,073 was used to repay the related mortgage loan and $506,687 was used to
complete certain improvements and pay certain costs, as conditions of the sale.
After closing costs, the Partnership received net proceeds of $11,148,837 and
recognized a gain of $21,483 ($0.62 per limited partnership unit) on the sale.
(Approximately $50,000 was received in the fourth quarter of 1996, upon the
finalization of all conditions.) A disposition fee of $343,488 was accrued but
not paid to the advisor. On April 25, 1996, the Partnership made a capital
distribution of $6,120,837 ($177 per limited partnership unit) from the
proceeds.
United Exposition
- -----------------
On October 28, 1987, the Partnership acquired two industrial buildings
and land located in Las Vegas, Nevada. On August 13, 1996, the United
Exposition property was sold for $5,372,500. The Partnership received net
proceeds of $5,202,964, after closing costs, and recognized a gain of $885,059
($25.34 per limited partnership unit). A disposition fee of $161,175 was
accrued but not paid to the advisor. On August 29, 1996, the Partnership made a
capital distribution of $5,187,150 ($150 per limited partnership unit) from the
proceeds.
NOTE 4 - REAL ESTATE JOINT VENTURES
- -----------------------------------
The Partnership was invested in two real estate joint ventures
organized as general partnerships with a real estate management/development
firm. One joint venture investment was restructured into a wholly-owned
property in 1996. The Partnership made capital contributions to the ventures,
which are subject to preferential cash distributions at a specified rate and to
priority distributions with respect to sale or refinancing proceeds. The
Partnership also made loans to these ventures. The Joint venture agreements
provide for the funding of cash flow deficits by the venture partners in
proportion to ownership interests, and for the dilution of ownership share in
the event a venture partner does not contribute proportionately.
The respective real estate management/development firm is responsible
for day-to-day development and operating activities, although overall authority
and responsibility for the business is shared by the venturers. The real estate
management/development firms, or their affiliates, also provide various services
to the joint ventures for a fee.
<PAGE>
The following is a summary of cash invested in joint ventures, net of
returns of capital or principal, and excluding investment acquisition fees:
<TABLE>
<CAPTION>
Rate of Ownership December 31,
----------------------
Investment/Location Return/Interest Interest 1996 1995
- ----------------------------- ---------------- ---------------------- ---------- ----------
<S> <C> <C> <C> <C>
Anaheim Distribution Center
Anaheim, California 10.5% 1995 - 61.6% (C) - $2,012,000
11.0% (L) - $2,670,331
Prime (L) - $ 454,276
Medlock Oaks
Atlanta, Georgia 10.25% 57% (C) $1,932,300 $1,932,300
10.25% (L) $4,850,094 $4,850,094
</TABLE>
(C) Capital contribution
(L) Loan
Medlock Oaks
- ------------
On December 4, 1987, the Partnership entered into a joint venture with
an affiliate of the Partnership and with an affiliate of Hill Properties, Ltd.,
to construct and operate five warehouse and service center buildings located in
Atlanta, Georgia. The Partnership made a capital contribution of $1,932,300 to
the venture which is subject to preferential returns of 10.25% per annum. In
addition, the Partnership made a construction/permanent mortgage loan to the
venture of $4,964,700, which bears interest at 10.25% per annum.
On September 3, 1991, ownership of the investment was restructured as
a result of the management/development firm's decision not to contribute its
required proportionate share of capital to fund operating deficits. Its
ownership interest was assigned pro rata to the Partnership and its affiliate.
As a result, the Partnership's ownership interest increased from 38.19% to 57%.
The aggregate minimum rents due to the venture under non-cancelable
leases are $950,240, $679,580, $206,515 and $60,062 in 1997 through 2000,
respectively.
The Managing General Partner determined in 1994 that the carrying
value of this investment should be reduced to its net realizable value.
Accordingly, the carrying value was reduced by $200,000 with a charge to
operations. In the first quarter of 1996, the Managing General Partner
determined that the Partnership would be unable to recover the carrying value of
this investment and, accordingly, the carrying value was reduced by $250,000
through a charge to investment valuation allowances. The property is now under
contract for sale which is expected to close in the second quarter of 1997. The
selling price will exceed the investment carrying value of $4,704,079 at
December 31, 1996. For the year then ended, the Partnership's share of joint
venture earnings was $280,509.
<PAGE>
Summarized Financial Information
- --------------------------------
The following summarized financial information is presented in the
aggregate for the investments in joint ventures:
Assets and Liabilities
----------------------
December 31,
--------------------------
1996 1995
---------- -----------
Assets
Real property, at cost less
accumulated depreciation
of $2,821,679 and $3,469,239 $7,702,658 $11,520,507
Other 288,149 352,804
---------- -----------
7,990,807 11,873,311
Liabilities 86,084 104,215
---------- -----------
Net assets $7,904,723 $11,769,096
========== ===========
Results of Operations
---------------------
Year ended December 31,
--------------------------------------
1996 1995 1994
---------- ---------- -----------
Revenue
Rental income $1,165,073 $1,571,560 $ 1,524,741
Other 114,609 110,184 113,514
---------- ---------- -----------
1,279,682 1,681,744 1,638,255
---------- ---------- -----------
Expenses
Depreciation and amortization 454,305 579,916 595,450
Operating expenses 321,958 409,923 365,800
---------- ---------- -----------
776,263 989,839 961,250
---------- ---------- -----------
Net income $ 503,419 $ 691,905 $ 677,005
========== ========== ===========
Liabilities and expenses exclude amounts owed and attributable to the
Partnership and (with respect to one joint venture) its affiliate on behalf of
their various financing arrangements with the joint ventures.
Effective January 1, 1996, the Anaheim joint venture was dissolved.
Accordingly, the 1996 amounts relate only to the Medlock Oaks joint venture.
<PAGE>
NOTE 5 - INCOME TAXES
- ---------------------
The Partnership's income for federal income tax purposes differs from
that reported in the accompanying statement of operations as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1996 1995 1994
------------------------ ----------- -----------
<S> <C> <C> <C>
Net income (loss) per financial
statements $1,709,735 $ (983,224) $1,531,224
Timing differences:
Property rentals (301) 303,432 48,406
Joint venture earnings (136,605) (153,412) (58,493)
Expenses (24,383) 3,978 3,978
Depreciation method (131,172) (101,083) (19,083)
Valuation allowance 250,000 2,600,000 200,000
Loss on sale (572,443) - -
---------- ---------- ----------
Taxable income $1,094,831 $1,669,691 $1,706,032
========== ========== ==========
</TABLE>
NOTE 6 - PARTNERS' CAPITAL
- --------------------------
Allocation of net income (losses) from operations and distributions of
distributable cash from operations, as defined, are in the ratio of 99% to the
limited partners and 1% to the general partners. Cash distributions are made
quarterly.
Net sale proceeds and financing proceeds will be allocated first to
limited partners to the extent of their contributed capital plus a stipulated
return thereon, as defined, second to pay disposition fees, and then 85% to the
limited partners and 15% to the general partners. Income from sales is
allocated in proportion to the distribution of related proceeds, provided that
the general partners are allocated at least 1%. Income or losses from sales, if
there are no residual proceeds after the repayment of the related debt, are
allocated 99% to the limited partners and 1% to the general partners.
NOTE 7 - SUBSEQUENT EVENT
- -------------------------
Distributions of cash from operations relating to the quarter ended
December 31, 1996 were made on January 30, 1997 in the aggregate amount of
$235,081 ($6.73 per limited partnership unit).
<PAGE>
COPLEY REALTY INCOME PARTNERS 1;
A LIMITED PARTNERSHIP
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Initial Cost to Costs Capitalized
the Partnership Subsequent to Acquisition
---------------------------------------------------- -------------------------
Encum - Buildings & Improve - Carrying
Description brances Land Improvements ments Costs
- ----------- --------------- -------------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Two one-story R & D
buildings (145,000 sq.ft) on
11.1 acres in Walnut Notes A
Creek, California. and B $6,777,729 $7,956,466 $1,371,782 --
Two one-story concrete
industrial buildings and one
cooler/freezer building
(128,178 sq.ft) on 6.5
acres in Las Vegas, Nevada. Note B $1,195,749 $3,980,657 $12,642 --
One-story warehouse building
(106,232 sq.ft) on 4.9
acres in Anaheim, California. Note B $1,279,147 $2,456,841 $111,186 --
-------------- --------------- -----------
Total wholly owned $9,252,625 $14,393,964 $1,495,610
============== =============== ===========
57% interest in Medlock Oaks
Associates. Owners of five --------------------------------------- See Note C --------------------------------------------
warehouse and service center
buildings (173,916 square feet)
situated on 14.9 acres of land
in Atlanta, Georgia.
Total real estate joint ventures
<CAPTION>
Gross amount at which
Carried at Close of Period
--------------------------------------------------
Investment
Buildings & Valuation
Description Land Improvements Allowance
- ----------- ----------- ------------ -----------
<S> <C> <C> <C>
Two one-story R & D
buildings (145,000 sq.ft) on
11.1 acres in Walnut
Creek, California. $6,777,729 $9,328,248 ($2,571,667)
Two one-story concrete
industrial buildings and one
cooler/freezer building
(128,178 sq.ft) on 6.5
acres in Las Vegas, Nevada. $1,195,749 $3,993,299 $0
One-story warehouse building
(106,232 sq.ft) on 4.9
acres in Anaheim, California. $1,279,147 $2,568,027 $0
----------- ------------ -----------
Total wholly owned $9,252,625 $15,889,574 ($2,571,667)
=========== ============ ===========
57% interest in Medlock Oaks
Associates. Owners of five --------------------------------------- See Note C --------------------------------------------
warehouse and service center
buildings (173,916 square feet)
situated on 14.9 acres of land
in Atlanta, Georgia.
Total real estate joint ventures
<CAPTION>
Accumulated 1996
Description Total Depreciation Sales
- ----------- --------------- -------------- ---------------
<S> <C> <C> <C>
Two one-story R & D
buildings (145,000 sq.ft) on
11.1 acres in Walnut
Creek, California. $13,534,310 $2,905,067 ($10,629,243)
Two one-story concrete
industrial buildings and one
cooler/freezer building
(128,178 sq.ft) on 6.5
acres in Las Vegas, Nevada. $5,189,048 $1,366,207 ($3,822,841)
One-story warehouse building
(106,232 sq.ft) on 4.9
acres in Anaheim, California. $3,847,147 $1,366,207 $0
--------------- -------------- ---------------
Total wholly owned $22,570,505 $5,637,481 ($14,452,084)
=============== ============== ===============
57% interest in Medlock Oaks
Associates. Owners of five $4,704,079 N/A
warehouse and service center
buildings (173,916 square feet)
situated on 14.9 acres of land
in Atlanta, Georgia.
_______________
Total real estate joint ventures $4,704,079
===============
<CAPTION>
Date of Date Depreciable
Description Construction Acquired Life
- ----------- ----------- ---------- -------
<S> <C> <C> <C>
Two one-story R & D
buildings (145,000 sq.ft) on
11.1 acres in Walnut
Creek, California. 1978 & 1980 09/11/86 25 Yrs
Two one-story concrete
industrial buildings and one
cooler/freezer building
(128,178 sq.ft) on 6.5
acres in Las Vegas, Nevada. 1964 & 1986 10/29/87 17 & 31.5 Yrs
One-story warehouse building
(106,232 sq.ft) on 4.9
acres in Anaheim, California. 1987 12/30/86 30 Yrs
Total wholly owned
57% interest in Medlock Oaks Phase I -1987
Associates. Owners of five Phase II-1990 12/04/87 30 / 15 Yrs
warehouse and service center
buildings (173,916 square feet)
situated on 14.9 acres of land
in Atlanta, Georgia.
Total real estate joint ventures
</TABLE>
Note: (A) First mortgage with principal balance of $4,215,073 held by John
Hancock Mutual Life Ins. Co. was paid off with proceeds of sale on April
9, 1996.
<PAGE>
COPLEY REALTY INCOME PARTNERS 1;
A LIMITED PARTNERSHIP
SCHEDULE III - NOTE B
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Reconciliation of Real 1996
Estate Owned 1995 1996 INVESTMENT
BALANCE CAPITALIZED OTHER VALUATION
DESCRIPTION AT 12/31/95 IMPROVEMENTS NET ASSETS ALLOWANCE
- -------------------------------------- --------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Walnut Creek, California $12,438,757 $1,031,003 $64,550 $0
Las Vegas, Nevada 5,176,859 12,189 0 0
East Anaheim Distribution Ctr. 3,763,820 26,063 (22,013) 0
--------------- ---------------- --------------- ---------------
$21,379,436 $1,069,255 $42,537 $0
=============== ================ =============== ===============
<CAPTION>
Reconciliation of Real ACCUMULATED ACCUMULATED
Estate Owned DEPRECIATION 1996 DEPRECIATION
BALANCE BALANCE DEPRECIATION BALANCE
DESCRIPTION AT 12/31/96 AT 12/31/95 EXPENSE AT 12/31/96
- -------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Walnut Creek, California $13,534,310 $2,905,067 $0 $2,905,067
Las Vegas, Nevada 5,189,048 1,269,083 97,124 1,366,207
East Anaheim Distribution Ctr. 3,767,870 0 83,671 83,671
--------------- --------------- --------------- ---------------
$22,491,228 $4,174,150 $180,795 $4,354,945
=============== =============== =============== ===============
<CAPTION>
Reconciliation of Real
Estate Owned
1996 BALANCE (NET)
DESCRIPTION SALES AT 12/31/96
- -------------------------------------- --------------- ---------------
<S> <C> <C>
Walnut Creek, California ($10,629,243) $0
Las Vegas, Nevada (3,822,841) 0
East Anaheim Distribution Ctr. 0 3,684,199
--------------- ---------------
($14,452,084) $3,684,199
=============== ===============
</TABLE>
<PAGE>
COPLEY REALTY INCOME PARTNERS 1;
A LIMITED PARTNERSHIP
SCHEDULE III - NOTE C
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996
1996 1996 AMORTIZATION OF
PERCENT BALANCE CASH INVESTMENT EQUITY IN ACQUISITION
DESCRIPTION OWNERSHIP AT 12/31/95 IN JOINT VENTURE INCOME (LOSS) FEES
- -------------------------------------- -------- --------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
East Anaheim Distribution Ctr. 100% $3,763,820 $0 $0 $0
Medlock Oaks Associates 57% 5,207,372 0 280,509 (7,704)
--------------- ---------------- --------------- ---------------
$8,971,192 $0 $280,509 ($7,704)
=============== ================ =============== ===============
<CAPTION>
1996
1996 CASH 1996 CONVERSION
DISTRIBUTIONS INVESTMENT TO
FROM VALUATION WHOLLY-OWNED BALANCE
DESCRIPTION JOINT VENTURE ALLOWANCE PROPERTY AT 12/31/96
- -------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
East Anaheim Distribution Ctr. $0 $0 ($3,763,820) $0
Medlock Oaks Associates (526,098) (250,000) 0 4,704,079
--------------- --------------- --------------- ---------------
($526,098) ($250,000) ($3,763,820) $4,704,079
=============== =============== =============== ===============
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
INDEX NO. 2
INDEPENDENT AUDITOR'S REPORT AND FINANCIAL STATEMENTS
OF MEDLOCK OAKS ASSOCIATES
Page #
Independent Auditor's Report of Habif, Arogeti and Wynne, P.C.......
Balance Sheet - December 31, 1996 and 1995..........................
Statement of Operations - For the Years Ended
December 31, 1996, 1995 and 1994...................................
Statement of Changes in Venturer's Equity (Deficit) - For the Years
Ended December 31, 1996, 1995 and 1994.............................
Statement of Cash Flows - For the Years Ended
December 31, 1996, 1995 and 1994...................................
Notes to Financial Statements.......................................
<PAGE>
MEDLOCK OAKS ASSOCIATES
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
<PAGE>
MEDLOCK OAKS ASSOCIATES
TABLE OF CONTENTS
-----------------
PAGE
----
Independent auditors' report 1
Financial statements:
Balance sheets 2
Statements of operations 3
Statements of changes in venturers' deficit 4
Statements of cash flows 5 - 6
Notes to financial statements 7 - 10
<PAGE>
[LOGO] HABIF, AROGETI&WYNNE, P.C.
============================
Certified Public Accountants
1073 West Peactree Street, N.E.
Atlanta, Georgia 30309-3837
(404) 892-9651
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Venturers of
Medlock Oaks Associates
We have audited the accompanying balance sheets of MEDLOCK OAKS ASSOCIATES [a
joint venture] as of December 31, 1996 and 1995 and the related statements of
operations, changes in venturers' deficit, and cash flows for the years ended
December 31, 1996, 1995, and 1994. These financial statements are the
responsibility of the Joint Venture'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 audits 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 MEDLOCK OAKS ASSOCIATES as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the years ended December 31, 1996, 1995, and 1994 in conformity with
generally accepted accounting principles.
/s/ Habif, Arogeti & Wynne, P.C.
Atlanta, Georgia
January 17, 1997
<PAGE>
MEDLOCK OAKS ASSOCIATES
BALANCE SHEETS
DECEMBER 31,
ASSETS
------
1 9 9 6 1 9 9 5
----------- -----------
Property, at cost, pledged as collateral
- --------
Land $ 2,083,500 $ 2,083,500
Buildings and improvements 5,771,252 5,762,432
Tenant improvements 3,072,584 3,085,687
----------- -----------
10,927,336 10,931,619
Allowance for depreciation [ 2,952,906] [ 2,539,128]
----------- -----------
7,974,430 8,392,491
----------- -----------
Cash 151,694 103,194
- ---- ----------- -----------
Other assets
- ------------
Receivables, net of allowance for doubtful
accounts of $12,000 for 1996
and $17,000 for 1995 77,125 84,391
Deferred lease commissions, net of accumulated
amortization of $185,876 for 1996
and $149,545 for 1995 59,330 82,990
----------- -----------
136,455 167,381
----------- -----------
$ 8,262,579 $ 8,663,066
=========== ===========
LIABILITIES AND VENTURERS' DEFICIT
----------------------------------
Liabilities
- -----------
Accounts payable and accrued expenses $ 22,421 $ 2,267
Notes payable 8,508,937 8,508,937
Guaranteed payments to venturers 2,171,719 1,824,244
Prepaid rent 17,839 -0-
Security deposits 45,824 47,550
Accrued interest payable 1,886,865 1,662,684
----------- -----------
12,653,605 12,045,682
----------- -----------
Venturers' deficit
- ------------------
Copley Realty Income Partners 1 [2,502,887] [1,928,093]
Copley Realty Income Partners 2 [1,888,139] [1,454,523]
----------- -----------
[4,391,026] [3,382,616]
----------- -----------
$ 8,262,579 $ 8,663,066
=========== ===========
See auditors' report and accompanying notes
-2-
<PAGE>
MEDLOCK OAKS ASSOCIATES
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1 9 9 6 1 9 9 5 1 9 9 4
---------- ---------- ----------
Revenues
- --------
Rental $1,165,073 $1,101,894 $1,087,696
Other 112,479 104,650 105,351
---------- ---------- ----------
1,277,552 1,206,544 1,193,047
---------- ---------- ----------
Expenses
- --------
Amortization 40,303 45,634 51,428
Bad debts 6,693 5,000 13,624
Depreciation 431,197 419,031 392,840
General operating 56,385 44,650 41,342
Insurance 4,152 4,440 4,489
Landscaping and grounds 29,249 24,867 14,475
Management fees 39,260 36,075 36,225
Professional fees 12,421 16,143 12,992
Property taxes 85,062 87,665 87,665
Repairs and maintenance 18,379 25,928 20,767
Utilities 39,686 43,270 52,350
---------- ---------- ----------
762,787 752,703 728,197
---------- ---------- ----------
Income from operations 514,765 453,841 464,850
---------- ---------- ----------
Other income [expense]
- ----------------------
Loss on abandonment of
tenant improvements [ 30,671] [ 41,792] -0-
Interest income 2,130 3,688 4,056
Interest expense [1,147,159] [1,086,792] [1,032,237]
---------- ---------- ----------
[1,175,700] [1,124,896] [1,028,181]
---------- ---------- ----------
Net loss $[ 660,935] $[ 671,055] $[ 563,331]
========= ========= =========
See auditors' report and accompanying notes
-3-
<PAGE>
MEDLOCK OAKS ASSOCIATES
STATEMENTS OF CHANGES IN VENTURERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Copley Copley
Realty Realty
Income Income
Partners 1 Partners 2 Total
---------- ---------- ---------
Balances, January 1, 1994 $[ 828,371] $ [ 624,909] $[1,453,280]
Net loss [ 321,099] [ 242,232] [ 563,331]
Guaranteed payments [ 198,061] [ 149,414] [ 347,475]
--------- --------- ---------
Balances, December 31, 1994 [1,347,531] [1,016,555] [2,364,086]
Net loss [ 382,501] [ 288,554] [ 671,055]
Guaranteed payments [ 198,061] [ 149,414] [ 347,475]
--------- --------- ---------
Balances, December 31, 1995 [1,928,093] [1,454,523] [3,382,616]
Net loss [ 376,733] [ 284,202] [ 660,935]
Guaranteed payments [ 198,061] [ 149,414] [ 347,475]
--------- --------- ---------
Balances, December 31, 1996 $[2,502,887] $[ 1,888,139] $[4,391,026]
========= ========== =========
See auditors' report and accompanying notes
-4-
<PAGE>
MEDLOCK OAKS ASSOCIATES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
Increase [Decrease] In Cash
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
- ------------------------------------
Net loss $[660,935] $[671,055] $[563,331]
Adjustments to reconcile net loss
to net cash provided by operating activities
Depreciation and amortization 471,500 464,665 444,267
Provision for allowance for
doubtful accounts [ 5,000] 5,000 [ 5,500]
Loss on abandonment of tenant
improvements 30,671 41,792 -0-
Changes in assets and liabilities
Decrease in receivables 12,266 9,826 82,407
Decrease [Increase] in prepaid
expenses -0- 2,400 [ 312]
Increase in deferred lease
commissions [ 16,644] [ 24,190] [ 29,373]
Increase [Decrease] in accounts
payable and accrued expense 20,154 [ 27,171] [ 164,553]
Increase [Decrease] in prepaid rent 17,839 [ 9,593] [ 33,693]
Decrease in security deposits [ 1,726] [ 8,062] [ 4,582]
Increase in accrued interest 224,181 343,772 340,390
--------- -------- --------
Total adjustments 753,241 798,439 629,051
--------- --------- ---------
Net cash provided by
operating activities 92,306 127,384 65,720
--------- --------- ---------
Cash flows from investing activities
- ------------------------------------
Acquisition of property [ 43,806] [118,669] [ 45,551]
--------- -------- --------
Net increase in cash 48,500 8,715 20,169
Cash, beginning of year 103,194 94,479 74,310
--------- --------- ---------
Cash, end of year $ 151,694 $ 103,194 $ 94,479
========= ========= =========
</TABLE>
See auditors' report and accompanying notes
-5-
<PAGE>
MEDLOCK OAKS ASSOCIATES
STATEMENTS OF CASH FLOWS [CONTINUED]
FOR THE YEARS ENDED DECEMBER 31,
1 9 9 6 1 9 9 5 1 9 9 4
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- -------------------------------------------------
Cash paid during the years for
Interest $922,978 $743,020 $691,847
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES
- --------------------------------------------------------
Increases in accrued guaranteed payments of $347,475 are reflected as a
reduction in venturers' equity for the years ended December 31, 1996, 1995, and
1994.
During 1995, $188,956 of fully amortized deferred leasing commissions were
retired.
See auditors' report and accompanying notes
-6-
<PAGE>
MEDLOCK OAKS ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Terms of the Joint Venture Agreement:
------------------------------------
MEDLOCK OAKS ASSOCIATES, a Georgia joint venture, was formed December 4, 1987
under an agreement between Copley Realty Income Partners 1 and 2 [CRIP 1 and
CRIP 2], two Massachusetts limited partnerships, and Hill Limited #10 [Hill],
a Georgia limited partnership, with initial ownership interests of 34.2%,
25.8% and 40%, respectively. Effective January 1, 1990, the respective
interests of the Venturers were: CRIP 1 - 38.19%; CRIP 2 - 28.81%; and Hill's
- 33%. On September 3, 1991, the Joint Venture entered into an agreement for
the transfer and assignment of Hill's 33% Joint Venture interest to CRIP 1 and
CRIP 2. Upon execution of the agreement, CRIP 1 and CRIP 2's partnership
interests increased to 57% and 43%, respectively. Under this agreement, Hill
has no rights or entitlements to any future allocations and distributions or
to any amounts accrued as of the date of the transfer.
The purpose of the Venture is to own and operate Medlock Oaks Business Center
located in Gwinnett County, Georgia. The Project consists of two phases.
Phase I consists of three office/warehouse buildings with approximately
114,900 rentable square feet and was completed in December 1987. Phase II
consists of two office/warehouse buildings with approximately 60,200 rentable
square feet and was completed in May 1990.
CRIP 1 and CRIP 2 initially contributed $1,932,300 and $1,457,700 to the Joint
Venture. Except as provided in the Joint Venture Agreement, the Venturers will
not be required to make any further capital contributions.
The operating cash flow, as defined in the Joint Venture Agreement, must be
distributed in the following order of priority:
- To CRIP 1 and 2, pro rata, based on their respective amounts of invested
capital, in payment of any monthly guaranteed payments.
- To CRIP 1 and 2, pro rata, based on their respective amounts of invested
capital, in payment of any outstanding accrued monthly guaranteed payments.
- To the Venturers in payment of their default priority returns.
- To the Venturers in payment of their deficit preferred returns.
- To the Venturers in accordance with their respective interests.
-7-
<PAGE>
MEDLOCK OAKS ASSOCIATES
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996, 1995, AND 1994
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [Continued]
------------------------------------------
Capitalization:
--------------
All costs related to planning, development, and construction of the buildings
have been capitalized as construction costs. Costs incurred to form the Joint
Venture, obtain financing, and promote the development have also been
capitalized.
Interest incurred on the notes was capitalized during the 1990 construction
and lease up periods.
Property:
--------
Property is carried at cost. Expenditures for maintenance and repairs are
expensed currently, while renewals and betterments that materially extend the
life of an asset are capitalized. The cost of assets sold, retired, or
otherwise disposed of, and the related allowance for depreciation, are
eliminated from the accounts, and any resulting gain or loss is included in
operations.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets which are as follows:
Buildings and improvements 30 years
Tenant improvements 15 years
Amortization:
------------
Deferred lease commissions costs were capitalized and are being amortized on a
straight-line basis over the term of the related lease.
Leasing Revenue:
---------------
Income from operating leases, which includes scheduled increases over the
lease term, is recognized on a straight-line basis. For the years ended
December 31, 1996, 1995, and 1994, income recognized on a straight-line basis
was less than income which would have accrued in accordance with the lease by
approximately $8,000, $5,000, and $90,000, respectively. Receivables which
resulted from recognizing income on a straight-line basis totaled $69,930 at
December 31, 1996 and $80,670 at December 31, 1995.
-8-
<PAGE>
MEDLOCK OAKS ASSOCIATES
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996, 1995, AND 1994
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [Continued]
------------------------------------------
Receivables:
-----------
The Venture provides warehouse and office space to tenants located in the
metropolitan Atlanta area. Credit is issued based upon the size of the
company, its past history, and other factors. Tenants are approved by all
venturers. If any defaults occur, the accounting loss would be the value of
receivables owed by the tenant, any unamortized leasing commissions and,
possibly, tenant improvements provided to the tenant by the Venture.
Reclassifications:
-----------------
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
Income Taxes:
------------
No provision has been made for income taxes because each venturer's
proportionate share of the Joint Venture income or loss is passed through to
be included in the individual tax return of the venturer.
B. NOTES PAYABLE:
-------------
Under the notes payable to CRIP 1 and CRIP 2, as amended effective January 1,
1990, the Joint Venture may borrow up to $8,710,000 ($4,964,700 from CRIP 1
and $3,745,300 from CRIP 2) at 10.25% per annum for the construction of Phase
I tenant improvements, the Phase II building shell and Phase II tenant
improvements. The notes bear interest at an annual rate of 10.25% per annum
which is payable monthly through December 4, 1997, at which date all
outstanding principal and accrued interest is due. The notes are secured by a
first mortgage on the land and buildings as well as an assignment of all
leases and rental income. Total principal due under these notes at December
31, 1996 and 1995 was $4,850,094 to CRIP 1 and $3,658,843 to CRIP 2.
Accrued interest of $1,033,002 and $1,083,815 relating to those notes has been
included in the accompanying balance sheets at December 31, 1996 and 1995,
respectively. The Joint Venture paid $922,978, $743,020, and $691,847 in
interest in 1996, 1995, and 1994, respectively.
C. GUARANTEED PAYMENTS:
-------------------
The Venture is required to make monthly guaranteed payments to CRIP 1 and 2
based on the amount of invested capital outstanding in CRIP 1 and 2's capital
accounts for each month during the year. The guaranteed payments accrue at
the rate of 10.25% per annum and unpaid guaranteed payments accrue at 10.25%
per annum. Guaranteed payments totaled $198,061 for CRIP 1 and $149,414 for
CRIP 2 in each of the last three years. Amounts accrued but unpaid are
$2,171,719 and $1,824,244 at December 31, 1996 and 1995, respectively.
Accrued interest related to the unpaid guaranteed payments totaled $853,863
and $578,869 at December 31, 1996 and 1995, respectively.
-9-
<PAGE>
MEDLOCK OAKS ASSOCIATES
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996, 1995, AND 1994
D. LEASE RENTALS:
-------------
At present, the Joint Venture has approximately 19 tenants. Future minimum
rentals to be received under the existing leases at December 31, 1996, which
are classified and accounted for as operating leases, are as follows:
December 31, Lease Revenues
------------ --------------
1997 $950,240
1998 679,580
1999 206,515
2000 60,062
---------
$1,896,397
=========
E. MATTERS AFFECTING OPERATIONS:
----------------------------
The Joint Venture has incurred operating losses since inception and currently
projects operating losses and cash flow deficits for the next year in excess
of committed borrowing capacity. Therefore, the ability of the Joint Venture
to continue as a going concern is dependent upon obtaining additional
financing, or funding from CRIP 1 and CRIP 2, since the success of future
operations cannot be determined at this time.
The management of CRIP 1 and CRIP 2 has indicated its intentions to provide
the additional financing as needed by deferring payments of interest and
making capital contributions or loans to provide for continued operations of
the Joint Venture through at least January 1, 1998.
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT NUMBER PAGE NUMBER
- ---------------- -----------
<S> <C> <C>
10A. Corporation Grant Deed as recorded *
September 10, 1986 from NBS Equity
Corporation to the Registrant.
10B. Assignment of Lease, Escrow Agreement, *
Construction Contracts and Warranties
dated as of September 10, 1986 by and
between NBS Equity Corporation and
the Registrant.
10C. Spanish Trace Joint Venture Agreement *
dated as of October 15, 1986 between
Oxford Spanish Trace Partners and the
Registrant.
10D. Joint Venture Agreement of East Anaheim *
Distribution Center Associates ("East
Anaheim"), dated as of December 31, 1986,
by and between Davis Anaheim Distribution
Center Associates, a California general
partnership ("Davis") and the Partnership.
10E. Joint Venture Agreement of Medlock Oaks *
Associates ("Medlock Oaks"), dated as of
December 4, 1987, by and between the
Partnership and Copley Realty Income
Partners 2, a Limited Partnership
(collectively, the "Affiliates") and Hill
Limited #10, a Georgia limited partnership
("Hill").
10F. Promissory Note dated December 4, 1987 from *
Medlock Oaks to the Affiliates.
10G. Deed to Secure Debt and Security Agreement *
dated as of December 4, 1987 between Medlock
Oaks and the Affiliates.
10H. Loan Agreement dated as of December 4, 1987 *
between Medlock Oaks and the Affiliates.
10I. Office Warehouse Lease dated as of October 28, *
1987, by and between the Partnership and
United Exposition Service Co., Inc., a Texas
corporation.
</TABLE>
_____________________________________________________
* PREVIOUSLY FILED AND INCORPORATED HEREIN BY REFERENCE.
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT NUMBER PAGE NUMBER
- ---------------- -----------
<S> <C> <C>
10J. Lease dated June 27, 1986 by and *
between NBS Equity Corporation, as
Landlord and Zehntel, Inc., as Tenant.
10K. Second Amendment to Joint Venture Agreement *
of Medlock Oaks Associates ("Medlock Oaks"),
dated as of January 1, 1990, by and among the
Registrant, Copley Realty Income Partners 2;
A Limited Partnership (collectively, the
"Affiliates") and Hill Limited #10, a Georgia
limited partnership ("Hill").
10L. Amended and Restated Promissory Note dated *
as of January 1, 1990, from Medlock Oaks to
the Affiliates.
10M. First Amendment to Deed to Secure Debt and *
Security Agreement dated as of January 1, 1990
between Medlock Oaks and the Affiliates.
10N. First Amendment to Loan Agreement dated as of *
January 1, 1990 between Medlock Oaks and the
Affiliates.
10O. First Amendment to Promissory Note effective *
as of January 1, 1991 by and between East
Anaheim Distribution Center Associates and the
Registrant.
10P. First Amendment to Construction Loan Agreement *
effective as of January 1, 1991 by and between
East Anaheim Distribution Center Associates and
the Registrant.
10Q. Transfer and Assignment of Joint Venture Interest *
in Medlock Oaks made and entered into as of
September 3, 1991 by and between Hill Limited #10,
a Georgia limited partnership, and the Registrant
and Copley Realty Income Partners 2; A Limited
Partnership, a Massachusetts limited partnership.
10R. Sublease dated as of March 16, 1994 by and between *
United Exposition Co., Inc. ("sublessor")and Hydra
Trucking, Inc. ("sublessee").
</TABLE>
_____________________________________________________
* PREVIOUSLY FILED AND INCORPORATED HEREIN BY REFERENCE.
<PAGE>
10S. Consent to Assignment of Property Management *
Agreement between Medlock Oaks Associates and
Anderson & Senkbeil, Inc. dated June 1, 1991,
assigned to Weeks Corporation dated October 1
1992, to Weeks Realty Services, Inc., L.P. dated
August 1, 1994.
_____________________________________________________
* PREVIOUSLY FILED AND INCORPORATED HEREIN BY REFERENCE.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COPLEY REALTY INCOME PARTNERS 1;
A LIMITED PARTNERSHIP
Date: March 31, 1997 By: /s/ Joseph W. O'Connor
------------------
Joseph W. O'Connor
President of the
Managing General Partner
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, Principal
Executive Officer and
Director of the
/s/ Joseph W. O'Connor Managing General Partner March 31, 1997
- ------------------------ ------------------------
Joseph W. O'Connor
Principal Financial and
Accounting Officer of the
/s/ Daniel C. Mackowiak Managing General Partner March 31, 1997
- ------------------------- ------------------------
Daniel C. Mackowiak
Director of the
/s/ Daniel J. Coughlin Managing General Partner March 31, 1997
- ------------------------ ------------------------
Daniel J. Coughlin
Director of the
/s/ James J. Finnegan Managing General Partner March 31, 1997
- ----------------------- ------------------------
James J. Finnegan
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,166,590
<SECURITIES> 298,492
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,465,082
<PP&E> 8,388,278
<DEPRECIATION> 83,671
<TOTAL-ASSETS> 9,853,360
<CURRENT-LIABILITIES> 73,152
<BONDS> 504,663
0
0
<COMMON> 0
<OTHER-SE> 9,275,545
<TOTAL-LIABILITY-AND-EQUITY> 9,853,360
<SALES> 1,582,943
<TOTAL-REVENUES> 1,689,421
<CGS> 84,876
<TOTAL-COSTS> 84,876
<OTHER-EXPENSES> 436,553
<LOSS-PROVISION> 250,000
<INTEREST-EXPENSE> 114,799
<INCOME-PRETAX> 803,193
<INCOME-TAX> 0
<INCOME-CONTINUING> 803,193
<DISCONTINUED> 0
<EXTRAORDINARY> 906,542
<CHANGES> 0
<NET-INCOME> 1,709,735
<EPS-PRIMARY> 48.95
<EPS-DILUTED> 48.95
</TABLE>
